RS Group PLC

Good morning, everyone, and welcome to the virtual fiscal year 2020 full-year results presentation for Electro Components. This is Lindsley Ruth, CEO of Electro Components, and today I'm presenting from Texas. It's very early in the morning, and I'm joined by David Egan, our CFO, who joins me from the United Kingdom. Firstly, I wanted to say that we both hope you and all your families are doing well and staying safe wherever this finds you in the world. Rest assured, while Dave and I are working safely remotely, there is opportunity in crisis, and we are working diligently to leverage our operating model strengths, working as one team worldwide, regardless of where we might be located. Now, given this is a virtual presentation, we have tried to keep it brief and to the point. For those of you who would like to participate in Q&A at the end of this presentation, please make sure you use the conference call dial-in. Slide three of the agenda. So I will reference the slides, and so will David as we go through the presentation. You can follow along on the phone if you don't see the slides. Starting on slide three, in terms of today's agenda, first I will give a quick overview of our performance in 2020 and an update of how our business is responding to COVID-19. and the acceleration of a new normal. So when I say 2020, I mean fiscal year 2020. Then David will take us through our fiscal year 2020 performance in more detail, run through current trading, April and May, and highlight some of the actions we are taking to protect profit and conserve cash. Finally, I will finish up on the strong progress we are making to set ourselves up for success through destination 2025, and how the changes we have been making position us well to continue to deliver share gains and emerge from the current crisis stronger. So moving on to slide five in the deck in our fiscal year 2020 results. 2020 was a strong year. We continue to drive revenue growth and market share gains despite uncertainty in many of our markets and the impact of COVID-19 during the final two weeks of March. We saw revenue growth and strong share gains in all three regions. Despite what seems so long ago, pre-COVID-19, we saw PMIs in contraction in more than 80% of countries around the world, if you recall, but it seems so long ago now. For us, RS Pro, our own private label brand, continued to show strong growth of 9%. This, in combination with the resilient performance in our industrial business, offset the cyclical downturn in electronics. We have continued to drive further improvement in customer experience, and group NPS was up 3.1% during the year. And it's important to note, as we've emphasized in every update since November of 2015, the customer truly is at the heart of what we do, and we cannot become complacent. and our customer satisfaction journey, it remains a huge focus for us. During the year, we accelerated both operating and capital investment to support our destination 2025 strategy, which has enabled us to adapt to the reality of remote working much more effectively and efficiently than many of our competitors. In fact, I've heard several stories recently of competitors rushing to order laptops and train people on how to work from home. For us, given our digital strength, it's been quite a seamless transition. In many ways, I would even say it's been more productive than before. This important strategic investment overall as a company meant adjusted profit was broadly flat during the year. And overall, these strategic investments and the strong progress we have made on the strategy will drive further differentiation into our offerings. helped to build a lean and scalable infrastructure and set our business up to deliver sustained growth and improved returns over the longer term. Now on to slide six, resilient business in response to COVID-19. I am extremely proud about the way our business and our people have responded to the current COVID-19 crisis internally as well as externally. We have acted decisively and responsibly to ensure we balance the needs of all of our stakeholders and our commitment to society and sustainability. Our teams across the world have been outstanding. They have shown incredible collaboration and commitment, as well as a willingness to look after each other and deliver for our customers and suppliers during this challenging time. Their health and safety and that of their families remains our number one priority. We responded swiftly in January to the crisis emerging in Asia to initiate homeworking for all roles that were able and to introduce new safety measures within our distribution centers to ensure people were kept safe. This valuable experience allowed us to develop best practices which have been shared across the world as the virus spread. Our DCs across the globe remain operational and we continue to provide a reliable service to our customers and suppliers. We take great pride in the speed of our response, as well as the resilience we have built within our model and as well as our people. Given this relative resilience of our business, we have taken the decision not to access the UK government support for furloughing employees at this time. I'm also extremely proud about the way the business has stepped up to play our critical role in supporting our local communities in the fight against COVID-19. We take our social responsibility seriously. Business absolutely has a role to play, as we cannot simply rely on government to provide all the answers. Please allow me to just share a few examples of how we're fighting COVID-19. We're playing our part, helping to distribute 3D printed personal protection equipment, or PPE, to frontline health workers, donating filament across Europe to help people produce PPE equipment, and also setting up our own 3D printing farms in the UK and Americas to support this effort. We've helped build supply chains, as well as assisted with design for a wide range of COVID-19 customer projects, including ventilated production, automated people counters, thermal imaging solutions, safety solutions, medical robotics, and industrial automation solutions, and the list goes on and on. We talk a lot about a culture of innovation in this business, and some of these projects have really shown this in action, as well as a strong purpose of making amazing happen by helping others. We remain highly committed to delivering value for our shareholders, And David will talk through some of the actions we are taking to protect profits and conserve cash later. We continue to advance with Destination 2025, our group strategy, and we're accelerating work to ensure our business is well positioned for the opportunities which will arise in the post-COVID-19 world. Of course, we recognize the importance of the dividend for shareholders. However, the board has decided it is prudent to defer the final dividend decision until visibility improves, and we will review this at the interim results in November. I'd like to stress that this is a deferral, not a cancellation. So now if we move on to slide seven, well-positioned for future opportunities. Over the last five years, we've made substantial investments to change the culture offer organizational structure and capabilities of electro components. We are now clearly seeing the benefits of these changes as our employee engagement scores and customer satisfaction scores have reached all-time highs. I do weekly podcasts emphasizing the importance of our people and their mental health. We might be in the middle of a crisis, but as I said, there is opportunity in crisis. The market might seem a bit dark now, but the sun will rise again, and so shall we. We have a highly differentiated and adaptable business model, which means we remain well-placed to win. And let me just give you a few examples. Our broad range means we have a very diversified customer base, as well as a very diversified supplier base. Our digitally-led omni-channel model means we can continue to serve customers with 63% of our revenue today online or in a digital channel. This is a massive advantage versus many of our competitors whose brick and mortar trade counter models are struggling. The global footprint of our distribution network has been critical in ensuring supply chain continuity for both customers and suppliers as we can switch supply from one VC to another. Our organizational structure has a part to play too. It has allowed us to respond and adapt quickly to changes in demand, in particular regional demand. We are also seeing more collaboration, more innovation, more agile decision-making than we have ever seen before. We're moving fast as a team, as one team, to take advantage of the opportunities that do exist. We've also set up weekly virtual trading operations teams where we pivot and capitalize on the rapidly changing customer opportunities with cross-functional teams linking marketing, sales, product management, and digital to coordinate our campaigns and customer delivery. We've also been collaborating across all regions on sales fronts, sharing ideas, materials, and best practices to target specific industry verticals with demand upside during the crisis. And as I said, the sun will rise again and so will we, but we aren't waiting for the market to change. Who knows when that might be? So we've initiated a program called Sunrise with seven work streams from innovation to marketing to focus on short-term opportunity. As I said, there is opportunity in crisis and we're looking for those opportunities on a daily basis. We've also initiated a program called Rise to the Future to look deeper at the new normal and how we should be adjusting our strategy and operating model over the next two years, which we expect further significant savings as a result. And we'll be providing more detail on both programs, Sunrise and Rise to the Future, at our half-year results presentation in November. As a result of all this activity and the hard work of our teams, the business is performing relatively resistantly down 14% during the first eight weeks of the year. And I'm confident we will continue and are continuing to win market share. All of this while making progress on the longer-term strategy. And with that, I will now hand over to David to talk through fiscal year 2020 performance in a little more detail. David?

Thank you, Lindsley. And good morning, everyone. Turning first to the financial highlights, which is on slide 9 of your pack. Group like-for-like revenue growth was 2.2%, a continued outperformance versus the market. Digital revenue growth for the year grew broadly in line with group revenue. RS Pro, our own brand, continued to see strong growth, like-for-like revenue growth of 8.9%. Gross margin fell 80 basis points on both a like-for-like and a reported basis, and I will cover this in more detail shortly. Adjusted operating profit fell 0.5% on a like-for-like basis. As reported at our interim, we accelerated spend on strategic initiatives. Excluding the $14 million of investment during the year, adjusted operating profit growth would have been closer to 6%. Adjusted EPS was up 1.1% on a like-for-like basis to 37.7 P. And we continue to have a strong balance sheet. Net debt increased to 189.8 million. But this now includes IFRS 16 lease liabilities of 56.3 million. We have not restated our prior year for IFRS 16. but you can find full details on the impact in the appendix of your PAC. Net debt to adjusted EBITDA remained low at 0.7 times. Turning now to our summary income statement, which is on slide 10. Revenue was up 3.7% or 2.2% on a like-for-like basis. The COVID-19 impact was approximately 1% on our full-year growth. Gross margin was down 0.8% to 43.7%. It was impacted by product mix, including lower growth in some higher margin products and strong growth in our lower margin OK-Do range. Adjusted operating costs were up 1.6%, less than revenue growth, despite the fact that this included $14 million of investment relating to strategic initiatives. Stripping out this investment, underlying operating costs actually saw a modest reduction, as efficiencies and lower incentive costs more than offset increases in wage inflation, volumes, and digital advertising. Adjusted operating profit margin fell 0.3 percentage points on a like-for-like basis to 11.3%. And adjusted PBT at $215 million was broadly flat on the prior year. Excluded from adjusted profit are charges of $15.4 million, and these relate to restructuring, amortization of intangible assets, and the asset write-down relating to British Steel in our IESA business. The adjusted tax rate was 21.8%, down on last year's rate of 23.6%. Turning now to the regional performance, which is on slide 11. All three of our regions saw a negative impact from COVID-19 during the last quarter of the year, which then impacted our second half growth rates. In total, we estimate this took about 1% off the full-year group like-for-like growth rate, but the impact was most heavily felt in our EMEA region. Despite this, EMEA saw full-year like-for-like revenue growth of 2.2%, almost entirely driven by share gains. EMEA continued to deliver operating profit growth, which was up 2.1% like-for-like in the year. Our Americas region saw like-for-like revenue growth of 2.1% during the year in what was a more volatile market. Our Americas profit was down 10.2%, like-for-like with lower gross margin and continued investment in areas such as talent and sales and marketing. We are pleased by the progress to date we have made in the Americas to build the right team, tools and infrastructure, to drive a more ambitious plan for growth in the region going forward. Asia Pacific saw like-for-like revenue growth of 2.7% in the year, and this growth was driven by strong performance in Southeast Asia and Australia. It was also pleasing to see Greater China return to growth in the final quarter of the year, despite the impact of COVID-19. Asia Pacific saw a significant step up in second half profit, aided by stronger growth and good progress on regional efficiency gains. Now moving to our cash flow on slide 12. Adjusted free cash flow of $80.9 million was marginally lower than the prior year, driven by investments to support the strategy. We increased our inventory levels to reposition electronics, to launch OKDo and to expand the RS Pro range. As a result, working capital as a percentage of sales increased by 1.7 percentage points to 23.9%. An inventory turn reduced to 2.6 times versus 2.7 times last year. In addition, we also increased CapEx to 74.7 million. Over two-thirds of the CapEx spend was focused on our strategic initiatives to transform our supply chain and improve our information technology suite so that we can scale our business and drive faster market share gains going forward. As such, CapEx to depreciation was 2.6 times, well above our typical maintenance expenditure of closer to one times. ROKI fell due to both the adoption of IFRS 16 and higher capital investment, but still remained attractive at 22.9%. Just a quick look at the balance sheet, which is on slide 13. As of the 31st of March 2020, our net debt to adjusted EBITDA was 0.7 times, and EBITDA to interest cover was around 34 times. This gives us plenty of headroom against our financial covenants, which we have laid out on the slide. As of the 31st of March 2020, we had committed facilities of 350 million, of which 189 was undrawn. These facilities are long dated, with August 2022 being our earliest maturity. Since the year end, We have been working to secure additional contingency liquidity facilities. We are approved to participate in the Bank of England COVID corporate financing facility. And we have credit approved new short-term facilities of 100 million with our existing banking partners. As things stand today, we do not plan to draw down on either of these facilities. which we very much see as backup or contingency facilities. Now moving on to current trading and two key priorities. I'm now on slide 15, current trading. We continue to manage the supply side of our business well. However, demand levels have been negatively impacted by the COVID-19 lockdown. measures which became extensive across our key markets during both April and May. During the first eight weeks of our year, group like-for-like revenue declined 14%. All three regions have seen declines. EMEA saw a like-for-like decline of 18%. The Americas saw a like-for-like revenue decline of 10%. And Asia-Pacific, saw like-for-like revenue decline of 2%. At a group level, the rate of revenue decline moderated slightly during May, as lockdown restrictions began to ease in some of our key markets. This effect was most pronounced in EMEA, driven by easing of restrictions, particularly in Southern Europe. The Americas at this point still remains volatile from week to week. Moving now to two key priorities, these being profitability and cash conservation. Firstly, on slide 16, driving efficiency and scalability. As an organization, we have a constant focus on driving efficiency. However, never has this been more important than right now. As you can see from the pie chart, the largest part of our cost base is people. at around 50%, approximately 20% of our costs are variable, 10% discretionary, and 20% is relatively fixed. The drop-through impact of lost revenues to adjusted operating profit for our business is typically in the mid-30s, pre-mitigating action. In the short term, we are proactively managing our cost base and limiting discretionary expenditure while ensuring we protect the core of our business to take advantage of ongoing market opportunities. We have temporarily stood down some of our people on full pay due to lower volumes. However, given the relative resilience of our business, we are not currently accessing UK government furlough subsidies. Longer term, we're on a journey to build a market beating disruptive offer, and a lean and scalable infrastructure to support growth. During the year, we made good progress with our three regions now aligned around a common go-to market approach and common value proposition. This aligned approach means we can accelerate progress and remove duplication. This work and continuing simplification of our operating model will allow us to move faster and drive further significant savings. Turning to slide 17, our second priority is about cash, conservation, and cash and liquidity. Given the degree of uncertainty in the world right now, we have performed a variety of stress tests on our business under a range of potential scenarios of different duration and severity. Our stress tests include scenarios where we see another occurrence of COVID-19 in our second half of similar magnitude to that of which we have seen during the last few months. This scenario results in minimal recovery in revenue in the balance of the year and higher impairment allowance against our 2021 receivables. We are confident that we have sufficient liquidity and can continue to operate within our current banking facilities, even under this range of demanding stress tests. To be clear, we have not included our contingency facilities within this stress test analysis. We remain highly focused on managing our cash and liquidity. We are a cash-generative business and typically generate strong cash as revenue growth slows. To ensure this happens, we are focused on working capital, capital expenditure, and dividend. From a working capital perspective, we are monitoring receivables ratios very closely. Reassuringly, to date, we have seen limited adverse impact from COVID-19 on receivable collections. We are also tightly monitoring inventory levels while ensuring we continue to offer our customers good availability. And finally, we are ensuring that we pay our suppliers to agreed terms. On capital expenditure, we have lowered our capex guidance. While our destination 2025 roadmap, including our 2DC expansion, remains a key priority for the group, we are slowing some less time-sensitive projects and reducing our 2021 capex from 80 million to around 60 million. And then finally, as Lindsley mentioned, the board believes it is prudent to defer the decision on a final dividend until we have greater visibility and the impact of COVID-19 on activity levels and cash generation in our key markets have become clearer. We recognize the importance of our progressive dividend policy to shareholders and will therefore review making an additional interim dividend payment relating to the financial year ended the 31st of March 2020 at the group's interim results in November 2020. And with that, I will now hand you back to Lindsley.

Thank you, David. We're now on to slide 19, which is emerging themes in a post-COVID world. Let me just start with one theme that's not on this slide, and that is I think in times of crisis, sometimes we realize those things we take for granted. For me, in the past, that was health, and I can assure you I've been back in the business fully healthy since the beginning of February. I feel great. I'm stronger than ever. But I think it also helps us to be a bit more appreciative of those around us. So I just want to take a moment to say thank you to you, David, to give you a big virtual high five on this call, a hug, and to say thank you, my friend, for stepping up as the interim CEO during my absence. I think you did a great job. So I'm very appreciative and just wanted to recognize you on this call. So thank you very much. You're a good friend. You're a great CFO, and you did a good job as a CEO. Hopefully not too good, but thank you. So we're now on to slide 19. There's no doubt that COVID-19 has changed how we all work and do business. While some of these changes will no doubt be temporary, let's hope, History has shown that previous crises can fundamentally change behavior. And this is a big part of how we're thinking as we prepare for the post-COVID world, however long that might be that we're in this situation and when we come out of it. And there are four things that I believe have radically accelerated during this crisis and which we believe we're well positioned for. Firstly, during the current crisis, customers and business have gotten used to interacting with brands online, transacting online, working online, and communicating socially online. So have suppliers. And just as SARS in 2003 drove the online behavioral change it did in China, we believe that this crisis will speed up digital transition in our own business around the world. We have a strong 1.2 billion pound digital business today, but it has the potential to be so much more. We need to continue to move at pace and be the best online. Second, the crisis has exposed the importance of supply chain continuity. Customers and suppliers alike will be looking for strong, agile partners with extensive reach. We have been investing in our global supply chain to ensure we can provide this critical support. We are also able to provide our customers with supply chain solutions via IESA. And this brings me on to my next point. In a potentially economically challenged post-COVID world, convenience and efficiency will be key for all customers and suppliers. This past week, I spoke to two key executives of one of our top suppliers. We've doubled our business with them over the past four years and intend to do it again in a shorter time period moving forward. What excites me most about our conversation is we both want the same thing. We're completely aligned in our joint approach to the new normal. We're focused on delivering the right value-added solutions to our customers to reduce their costs by saving time right across their processes. from design procurement through to inventory management and maintenance while leading in a digital way. This is the key to winning now and in the future in partnership with our suppliers. And finally, safety in the workplace will remain a focus and be expanded to encompass hygiene in a way it didn't before. Expect companies to level up their PPE usage, be this the factory floor or the front office. We are ensuring we can provide our customers with the products and solutions they need to keep their people safe. Turning on to slide 20, well-positioned, executing upon a clear strategy. Across the year, we have made great progress on our destination 2025 strategy. We continue to place significant focus on offering our customers more in terms of our range as well as value-added solutions. Over the last year, we have repositioned and expanded our electronics business. We've launched OKDo and expanded our own brand range, RS Pro. Our teams throughout the year have been developing and rebuilding our RS website, which will help drive an improved mobile experience. We're also making good progress at building a lean and more scalable supply chain. Our Americas Distribution Center expansion is set to finish this summer. and work is ongoing for the German distribution center expansion to complete in the next calendar year. We've continued to also expand our global shared business service centers, and these are helping us to improve service at a lower cost. We are investing in our system, and we've made strong progress in the area of product and content technology, which is key to driving improved experiences online. launching a new document management system during 2020. This and our product information system will also enable us to scale our range, rapidly improve time to market for new products, and lower our costs to serve customers as well as suppliers. Finally, we've made some great progress at driving greater collaboration across our regions, and we've reached alignment around a common go-to-market approach. And his role of Chief Operating Officer, Mike England, will be helping us to take this to a new level so we can move faster and drive economies of scale across the business. And now turning to slide 21, well-positioned from the digital leadership standpoint. We've talked to you for some time now about digital transition in our industry. This is accelerating rapidly. While demand levels across our industry are down, online traffic levels are seeing growth, and we are well-placed to benefit from this trend. We're a leader in digital. While digital represents 63% of our revenue, around 1.2 billion pounds of revenue, through the customer's lens, the vast majority of our purchasing journey is online, as we no longer print a catalog. Over the last five years, we have transformed our online experience and built up industry-leading talent in this area. It is one of our key competitive differentiators in the industrial space. And this slide shows the online penetration of a selection of our larger listed industrial distribution peers. However, obviously, the vast majority of our competitors are much smaller and would be even further behind us. We are not complacent, however, as a quarter in the digital world is like a year in the analog world, and we can never stand steel. Our Rebuild RS Mobile first responsive website, as I mentioned earlier, will launch in the first half of this fiscal year and will drive a step change online experience in EMEA, Europe, Middle East, and Africa, and Asia Pacific. We have further work we need to do with allied and the Americas also on this front. During the past financial year, we have been piloting new technologies to accelerate customer acquisition and to optimize and improve returns on paid acquisition or search with an increased focus on customer value and profit. Customer acquisition cost is the new rent in the online world. We are now rolling these technologies out across the globe to maximize our profit on customer acquisition costs. Finally, we are increasing our digital marketing with a focus on customer re-engagement and retention and step-changing personalization to drive a higher average order value for basket size. There remains huge opportunity for us to grow and develop online. So moving on to slide 22, well-positioned with our targeted range expansion, We have very strong supply relationships, so there's no doubt about that, and we continue to add new suppliers as we speak this morning. And over the last few years, we have invested significantly in our suppliers via inventory, and these relationships have strengthened even further in recent months. Our broad range and high inventory availability means we appeal to a wide customer base covering a broad spread of sectors. Over the last few years, our investments in data and technology and improved sourcing capabilities mean we can now move at pace as an organization to identify trends, launch products efficiently, and with high-quality content. In fact, we have reduced the time it takes to launch a new product by 80%, 80% over the last two years, and work continues to make this process even faster. These capabilities position us well to perform in the current environment, and our teams around the world are moving quickly to source in-demand products at higher volumes and pivot our offer towards higher demand sectors and categories. RS Pro, our own private label business, has launched kits and solutions to support our customers but the challenges of bringing people safely back into the workplace, whether it be with PPE or social distancing signage. We are using data and the strength of the ER supply chain to expand allies range into higher margin MRO products, and our teams across the world are collaborating more than ever before to not only extend supplier relationships across our regions, but also drives best practice in economies of scale on purchasing. So just in the last week, we've actually added 60 new suppliers to Ally and 40,000 new products from the RS range from a call that I had last week. So good progress on that front. Now on to slide 23. We're well-positioned from a value-added standpoint. In an environment where all companies are looking for ways to make their operations more efficient, Our suite of value-added solutions, which help organizations reduce process costs, eliminate waste and downtime, and lower inventory holdings, are well-placed to benefit. We're accelerating work to roll out our value-added solutions further across the world, which today are by far most advanced in the EMEA region. We are also looking to develop an ISA-like service for our RS and allied customers. We call it RS+. which combines the strength of IESA's cloud-enabled proprietary marketplace solution, which is called MyMRO, with RF's suite of value-added solutions. And we're currently piloting this with a number of RF customers in EMEA. In addition, we continue to make good progress with IESA's core business and have recently added new customers, including United Biscuits, Nestle, and 3N. We went live with 3M last fiscal year, and we're now serving them across 11 sites. RF is also winning new customers for its value-added solutions proposition. In addition to IESA, we've been working closely with Amazon to provide solutions to help manage their maintenance requirements of their warehouses across the U.K. And in fiscal year 20, they were our fastest-growing U.K. corporate accounts. We now have the opportunity to replicate this success across EMEA and we're working closely with Amazon to maximize this relationship and then we can look at the rest of the globe. So in summary on slide 24, firstly let's not forget we had a strong year versus our competition in fiscal year 2020 and we made good strategic and operational progress. We entered this crisis in a very strong position and through our focus will emerge strongly. Our response to COVID-19 has, I believe, highlighted some of the best things about this business. The power of our online offer and the global network, the capacity for innovation, the ability to move quickly and make amazing things happen for our customers, suppliers, and the communities around us. I am... passionate about this business and our focus on ESG, which wouldn't be as enjoyable and rewarding if it were not for the loyal, hardworking men and women of Electro Components, who I'm proud to call my colleagues. This is all possible because we have fundamentally changed how we operate and our capabilities over the last five years, such that our business model is adaptable and resilient. Our results speak for themselves, but that was in the past. And as I always say, the older I get, the more I believe in what people do as opposed to what they say. We aren't resting on our past performance, rest assured. We're taking action now to better prepare for the future, and I very much look forward with David to discussing this in more detail with you in November at our half-year results. The future remains uncertain, but as David described, We're taking the right short-term actions to protect profit, conserve cash, and we do have a strong balance sheet with sufficient liquidity, even under a demanding range of stress scenarios. We remain highly committed to our destination 2025 strategy and are accelerating work in some areas where we see opportunity in a post-COVID world. We are well positioned to emerge from the current downturn strongly with enhanced share. Now, I'd like to pass it back to the operator to open up the conference call line for Q&A. Operator?

Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keyboard now. If you change your mind, please press star followed by two. When preparing to ask a question, please ensure your phone is unmuted locally. Our first question comes from Keean Marden from Jefferies. Keean, your line is now open. Please go ahead.

Morning, all, and great to hear you back, Lindsay. I have some three, if I can. Can you just help us understand your strategy regarding skew numbers and also put that in the context of the broader market? So I think your skew numbers in the UK and US have been broadly flat for about the last six to 12 months, but it looks like Farnell and DigiKey have added anywhere sort of 5%, 10% upwards. So what are they doing that you guys are? Are you diverging or are you moving towards each other in certain different product verticals? Secondly, are there any operating protocols post-COVID that might lead to a step change upwards in your operating costs? Or are you sufficiently automated but that isn't particularly material? And then finally, you touched on this a little bit earlier, but what are the new roles for the CEO position And if that role has freed up time for others, what are they using that for?

Yeah, thank you. So first of all, in regards to strategy and SKU numbers, we haven't talked a lot about our SKU numbers, but we've been doing a lot of cleanup in terms of our inventory. So taking bad inventory replacement with good inventory, finding new suppliers, et cetera. So I'll give you a further detailed update certainly at the half year. in regards to supplier strategy, as I'm leading those category reviews myself. In regards to the Americas, we've actually increased our SKU count in the Americas, not by 5% or 10% like our competitors, but by 20% prior to the new warehouse being opened. So we've actually made room in the existing space, cleaned up quite a bit, We'll start the transition into the new space and the new highly automated space. I was there a few weeks ago, and they were doing tests that day. So we said in the presentation that we'll be opening that this summer. But, you know, it's really closer to this month where we'll begin moving products in as opposed to the latter part of the summer. But we have increased our SKU count by more than 20% in the U.S., We do have a roadmap. We'll do that over time, but we'll do it intelligently. So we don't want to take, obviously, a major hit to our inventory turns, and that's always the concern when you sign new suppliers. So we want to be data-led with how we add new products. But in terms of the strategy, our strategy is to add more non-inventory lines from our suppliers. Phoenix Contact is the first supplier where we offer their entire range. So as of last week, we're now offering the entire range from Phoenix Contact, both in-stock, and there's some items that we call DNS, which is vendor non-stock. So we're using that as a test. We're doing more Siemens or Schneider. So some of our top suppliers are expanding the range dramatically and may have a lead time associated with it. So we're working through those issues as we speak. What we've guided in terms of destination 2025 is, is our goal ultimately is to have more than a million stocked line items. Today we're roughly around just over half a million stocked lines. So that you'll see over time expand, and expand obviously into similar product areas. So it's not going deeper in existing ranges that we offer because we're quite deep there, but expanding deeper into areas like PPE, mechanical, et cetera. So we can share more of that in the future. As far as verticals are concerned, obviously we pivoted, which is the great thing about how we set up this business. And when I talked earlier about the resiliency and the adaptability of our model, that is part of it. Our ability to shift our focus away from slower industry market segments or verticals into those that are in growth right now. So food and beverage, pharmaceuticals. some of the processing industries. So we've had to do that in the U.S. away from oil and gas, which was a small percentage, but albeit in the central region, still a large part with third-party suppliers, et cetera, and to other areas. So that is something we've been very focused on. Inventory then follows along with that. So we want to offer a broader range to certain verticals as well. As far as the COVID costs, We figure it's about a million pounds of incremental cost that the COVID-19 situation has created for us. So it's not really that different from what we've talked about in the past in regards to preparation for a hard Brexit. So it's something that Brexit, unfortunately, gave us the experience. Fortunately, depending on how you look at it, gave us that level of experience to really understand our cost structure. I think it's also helping us understand... Look, I mean, there's some things, as I mentioned, if you look at what SARS did with China and the acceleration of online, we're seeing similar trends that I think will stay way beyond the impact of COVID-19. So we're seeing a shift in behaviors that probably will be around for quite some time. So questioning roles and responsibilities is the right thing to do as we adjust and adapt to the new normal. But outside of that incremental million pounds of cost, there are no substantial incremental costs. Obviously, we would like to have more inventory on safety products. The level of search we've seen on safety products has gone up dramatically from mostly B2C customers, but also B2B. But we've seen in some markets a doubling of traffic and mostly related to Single item, PPE searches, mask, gloves, those types of things. And then the last question you had was in regards to the COO role. So I look at Mike's number one responsibility is sales and marketing and ownership of the regional P&Ls related to RS and Ally. So looking at a common go-to-market approach. So it doesn't really replace anyone's role other than me. So I would say it allows me to be a bit more strategic, to develop more relationships longer term on the M&A front with those companies we don't have relationships with. But again, as we've always said, our number one priority is organic growth. So it allows me to have my hands free so that I'm not just playing a CEO role and a CEO role, so I can focus in on the right thing. ESG is a huge priority of mine. You'll see on slide 32 in the deck today, we've added five additional non-financial metrics to track our progress against our strategy. So you'll see additional metrics around people and the environment and safety. So that's a huge priority of mine. It always has been, but I want to spend more time in that area. So you'll see more in our annual report. And ICESG, we still use corporate social responsibility in our annual report, but we'll be transitioning that over time to use more of the common language that investors are using today. But for us, definitely environmental and social responsibility is huge. And I want to spend more time in that area. And we're doing a lot in that area too. So it's not just talk. So with that, you know, Mike's responsibility is something that we have planned for a long time as part of our succession planning to make sure that he has the proper experience on a worldwide basis. So that's the number one responsibility for him is driving that regional performance.

Excellent. Very clear.

Thank you.

We now have a question from Sam Bland from J.P. Morgan. Sam, your line is now open. Please go ahead.

Morning. Three questions as well, please, if I can. Obviously, I think you talked about this slight improvement in May. I just want to get a sense. Was it only slight or was... May kind of dramatically better than April. Second question is on market share in this first eight weeks. I mean, it sounds as if because you've got a little bit more, a lot more digital presence and peers probably gaining share. Do you think that's fair? And how does that kind of come through? Is that sort of basket spend or basket size holding up better or with existing customers or basically more new customers coming across? And then I want to get a sense on this $14 million strategic spend. Is that something that at some point would go away, or is the reality with this Destination 2025 program that those kind of expenditures are going to be here for a while as the business keeps on changing? Thanks.

Okay, thank you, Sam. I'll take one and two, and then David can answer the $14 million on the investment side. As far as May is concerned... It was a pretty significant improvement over April. And what we saw is as countries reopened, we saw more normalcy back into the numbers. And obviously, there was some pent-up demand because of those locations that were in complete lockdown. But as you can see from our numbers, APAC has reopened. and many markets were back in growth. We expect similar performances. Now, I will put a caveat to it that what most people have forgotten is pre-COVID-19, we were trending, and I say we as in the industry, the market in general was trending towards a deeper contraction heading towards the recession in my book because more than 80% of the PMIs were in contractions. So, you know, we haven't seen the return as those locations have reopened to a pre-COVID world, meaning growth of PMIs north and 50. So, you know, it's hard to predict the future and what we're going to see. But certainly, as things have reopened, we've seen better performance overall of those markets. And without a doubt, to the second point of your question, we know we're taking market share. We're up in 38 of our top 50 lines. 37 of those lines are what we would classify as industrial. 13 are electronic. Of the 37, we're up in 29. On the industrial side of the 13, we're up in nine on, let's see, actually, yes. Yeah, I think that's right. Eight, actually. Eight of the 13, so 37 of 50, actually. Okay. So 29 and 8. We're up 8 of 13 on the electronic side, which means we're taking market share. When I say up, I mean we're up as opposed to the channel. So we do know that we're taking market share. And to your point, having the online strength is a huge benefit today as more customers are working from home as well. So we see that as a significant advantage. Now, you asked about new customers. New customers, roughly, we're around 4.8%. and we're seeing a lot of online traffic. We're seeing a lot of searches. We're seeing a lot of new customers, which is good, but the biggest challenge with new customers in an online world is retention of those new customers. So we have a major internal focus now on returning customers and actually focus on retention of new customers so that we can keep them as existing customers, so not just one-time buyers that come in Maybe they buy a safety product and they leave. We want them to be long-term customers. So we're now looking at, as I referenced on the call, not just profit in terms of our customer acquisition cost, but also long-term value or LTV as well. As far as strategic investment, let me just flip it to David to comment on the $14 million.

Sure. Yep. The $14 million in FY20 was focused on areas such as OK-Do people, talent, and technology. You know, our best view at the moment for FY21 is it sort of going to be closer to the 10 million. And then over time, it will certainly diminish sort of the view. One additional piece of clarity with regards to the first question of what we saw in April and May, you know, I think we did see a slight improvement at the group level. If you look in the individual markets, the greatest improvement came from Southern Europe. which was principally France, Italy, and Iberia, which pretty much opened up. In other markets, such as the UK and Germany, sort of flat to very slight improvement. And then in the Americas, we have seen the greatest sort of volatility in the Americas market. So the Americas is the one that's a little more difficult for us to call. And then finally, for APAC, you know, we have seen good improvement coming through the APAC region. And, you know, China, as an example, has been in growth, you know, throughout this period, albeit of small numbers, and the comps are relatively small. But, you know, even it all started in China, but China has sort of delivered growth through that period.

Okay, understood. Thank you very much. Thank you, sir.

We now have a question from Rajesh Kumar from HSBC. Rajesh, your line is now open. Please go ahead.

Good morning. Thanks for taking the question. First, when you look at the improvement you've seen in most recent weeks, is there just a geographic pattern or are there certain sectoral patterns as well in terms of whether MRO is doing better than or if we could get some color on that, if that is possible, it would be very helpful. Second, you mentioned inventory obsolescence earlier. Could you give us some framework as to how you're thinking about inventory obsolescence, especially during the COVID-19 period? I appreciate you hold the inventory for a very long time. And if our lockdown is for three months, it may be well beyond the period you hold inventory. So potentially not a big impact, but just in terms of current run rate of obsolescence and how you're thinking in terms of increasing it or putting more provisions for that. And finally, when you talk about market shares, are you assessing your market share gain by comparing your growth rate against that of your peers or you're talking to suppliers and the volume you're doing with suppliers versus what your competitors are doing or it's a combination of all these factors. How do you assess the market share?

Yeah, thank you. Thank you, Rajesh. Let me start with market share and work backwards. First of all, in terms of market share, the best way to measure market share and distribution is always the supplier. Because there's not, you know, everybody likes to compare us to Farnell, though Farnell is pivoted and has a much greater focus on electronics as they became part of the AdNet organization in the last couple of years. So they're even not a great comparator, but that's what people historically have used. And Obviously, we've performed better than they have over the last year, but we look at the best way to do it. When I talk about markets here, I talk about the channel. When I say the channel, I'm talking about distribution, and that is how we compare versus our competitors with that specific supplier. And when I used the case earlier in regards to the suppliers, that was versus distribution in general than the share we have of the channel. That's the best way in our business to track market share outside of market share gains with individual customers, which is also important. And we call that share of wallet. We also track that. But obviously, we don't have all the customers in the world. And the better indicator is on the supplier front. As far as inventory is concerned, my reference was to bad inventory. Now, to me, bad inventory, sometimes people call it bad in excess. They'll call it excess and obsolete. I look at excess as being bad, too, over a certain level. We don't really have a significant problem with obsolescence. We're provisioned at the right level, and I think we have... We've done a great job over the years at managing the obsolete inventory. And I would think, if anything, we could probably be a bit more aggressive with suppliers on that front, but we're accurately provisioned. So obsolescence is not really a concern in our model. It's the length of time we hold the product that's more of a concern. So it's more on On new products, as we add the range, we might have to sit on a product for two years. So it's that slow-moving product that we want to move and to get rid of and not to sit on as long. Now, in our model, it's important to have the long tail of inventory. It's just the question is getting that level of inventory right. So I don't want to alarm anybody by thinking we've got a lot of obsolete inventory because we don't. It's just the nature of having a turn level of 2.6, 2.7, and that range. In this industry, you always have to be looking at, which translates into over 120 days of inventory. So in this business, you always, always have to be looking at your inventory and the freshness of that inventory. But that's the name of the game, and that's one of the reasons distribution exists, is to hold inventory. We've never forgotten that, and that's the value proposition of a distributor is inventory holdings. So we don't want to lose that value, but we want to be more intelligent with what we do on the inventory front and make sure that we have the right products and stocks. So it's really all about availability and making sure that we're constantly focused on getting the balance of terms and availability right. So again, don't be alarmed over obsolescence. That's not an issue. And there's been no change with COVID-19 in regards to the level of obsolescence, up or down. that we see in the industry. And then onto the improvements that we're seeing in terms of really ultimately market share gains. And you had referenced industrial versus electronics. For us, we're seeing gains in both, as I referenced earlier. So it's not really a product related, although I will say industrial is slightly better than electronics. And I would say the reason for that is our private label range tends to be more industrial than electronics. So that's a benefit as our private label range has outperformed every other product range within our business outside of our single board computing business, OK2, which continues to do well. As far as geography versus sectors, certainly to David's point as he went through the countries and the performance, as those countries have reopened, we've seen better performance in those countries. So there is a geographic slant to it, but also a sector slant. You know, we've obviously seen greater growth in food and beverage than we have facilities and maintenance, as an example, which is a category of ours. And so without getting into the specific sectors, because some of that's proprietary, but we have pivoted to those sectors that are certainly in faster growth. But I would say the greater improvement we're seeing is in the geographies as they reopen.

Thank you.

Thank you, Justin. Next question, Rachel. Any more questions, Rachel? I think we might have lost the operator, which would be a first. Well, if there aren't any further questions or since I don't know how to operate the phone system here. If you do have questions, please let Polly know or you can email us directly and we'd be glad to answer any questions or to jump on a Teams call or a Zoom call with you at any point in time. I just want to say a special thank you to all of you for being on the call today, and I wish you nothing but the greatest safe and health and best of luck to everyone in the post-COVID world. Thank you for your time today, and we look forward to speaking to you all soon and certainly seeing you hopefully live in November. So talk to you soon. Bye for now.

Thank you. Thank you very much.