RS Group PLC

Good morning, everyone, and welcome to the virtual 2021 interim results presentation for Electro Components for the six months to the 30th of September, 2020. I'm Lucy Sharma, responsible for investor relations at Electro Components. I'd like to introduce you to Lindsley Roo, our CEO, who joins us from Texas today, and David Egan, our CFO, who is in the UK. First, on a technical note, if you'd like to ask questions at the end of this presentation, please dial into the audio conference call and use the presentation slides on our website under our investor relations link. Over to you, Lindsley.

Thank you very much, Lucy, and I wanted to start by saying that we hope you and all of your families are doing well and staying safe. Our number one priority remains the health and well-being of our employees, and we continue to do all we can to ensure their safety. These remain difficult and uncertain times that have got worse over recent weeks, especially in Europe and in the United States. We remain very mindful of the challenges our colleagues and all of our stakeholders are going through today, personally and professionally. Electro Components has worked exceptionally well through this crisis. I am so proud of our team. Our team has done an amazing job. at demonstrating the resiliency within this business, the leadership within this business, and most importantly, protecting those around them during this pandemic, their families, their coworkers, while still delivering on the key initiatives within the business. Our digital and technological capabilities around the group have been a great strength. Our management teams have been more connected than ever as we work remotely and our employee engagement has remained at high levels throughout the pandemic. Most importantly, our DCs have remained open and our operating model has not been disrupted as we continue to deliver for our customers and suppliers while protecting our people dedicated to delivering for our stakeholders and our distribution centers. Our people have been amazing. And we have returned to business as usual, quicker than we expected, albeit with new norms. In short, we have adapted well. So on to slide four. We have been resilient during this crisis. Not something that we could have said about electro components when I joined the business five years ago. This resilience has been driven by repositioning the business, allowing us to perform well given the challenges that COVID-19 presents, despite no PPE benefit, personal protection equipment benefit. We have continued to drive market share gains as we have focused on delivering customers and suppliers a reliable and trusted service. And it is our differentiating and outstanding customer service that gives us an edge and builds a bigger barrier against competitive threats. Four key areas to highlight. One, our value-added solutions offer as we partner with our customers. Two, our omni-channel offer, which isn't just digital, but an entire service infrastructure. Three, our own brand proposition, our private label, RS Pro, develops products our customers need. And four, it goes without saying, our customer service and technical support, which is down to the outstanding people we have. that have delivered and continue to deliver and improve customer experience for our customers. This pandemic has brought challenges as well as opportunity. And oftentimes we hear the words, there is opportunity in crisis. It's no different for us. COVID-19 has driven an acceleration in the industry and customer trends towards our proposition, providing more of an opportunity for us both now and in the future. Rise will help us to grasp this opportunity. It is not a change in our strategy. Rise is an acceleration of our strategy, which we call Destination 2025, to make electro components a leaner, more agile, and more responsive business. The improving momentum we have been seeing is not driven by the market, but rather the work we have done to turn this business around. The confidence in our model and our financial strength led the board to recommend resuming our dividend policy with reinstatement of the final dividend that was deferred last year and to propose an interim dividend this year. Today, we have the building blocks in place to go faster so we can accelerate our growth strategy. Many of you heard me five years ago, almost to the day, when I presented my performance improvement plan. And at that point in time, I never used the word strategy once because it was more about execution than strategy. And that strategy was focused at the time on execution and more specifically getting the basics right and setting strong foundations. It was based on three principles of delivering the best customer and supplier experience. So putting the customer and supplier back at the heart of everything we do. creating an accountable and responsible organization, driving accountability and P&Ls back into the business, and operating their left. And that is exactly what we have delivered as seen on slide five. We have turned this business around. Improving the customer journey and experience has always been at the center of all we do. We have seen a further improvement in customer net promoter score the way we measure customer satisfaction, now standing at 56.3 on a worldwide basis, gaining in all regions despite the challenges that everyone faces. Our productivity continues to improve, with revenue per employee increasing by 37% over the last five years. We don't just sell solutions. We use them ourselves. to deliver these improvements. Our omnichannel offer is industry-leading and has underpinned our digital revenue growth and our market outperformance. We continue to focus on improving our margins by increasing the proportion of our own brand private label products to RS Pro, adding more value-added solutions to our offer, and also driving overhead efficiencies. Most importantly, We have transformed the culture within this business and invested in our people. To this end, we have seen our employee engagement scores rise the highest ever at 75 in the first half of this year. This is a testament to our incredible leaders and the way our people have all worked together through this crisis. So how do we differ from the competition? So let's flip to slide six. and let's first look at our omnichannel approach. We have a strong omnichannel business based on customer type and needs. This is not just about digital, it's about the whole offering, which continues to expand. Our omnichannel model is a significant advantage to us, as many of our competitors don't offer the customer the choice of being able to order exactly how they want to order. We have a lot of data from our digital operations, more than most of our peers. This allows us to understand and optimize customer lifetime value through targeted acquisition. We've also been able to redirect our marketing spend and drive increased returns on advertising spend. So while we focus on improving our digital returns, we will continue to leverage our omni-channel capability to meet the needs of our customers and outperform our competition. So let's move on to slide seven and another area of differentiation from our competition, our value-added solutions business. Our value-added solutions generate cost efficiencies for our customers by saving time across their procurement process, eliminating waste and downtime, and lowering inventory holding. We find solutions to procurement processes and problems using specialist businesses within maintenance, inventory management, procurement, and design. Building these layers into our proposition increases the moat between our business and the competition and increases the stickiness of our customer relationships. Our outsourced procurement inventory and storage management services business has seen an increase in customer engagement and client wins during the first half as customers have increasingly wanted more time-saving solutions. We are on track to offer an IESA-like proposition to our customers in the RS world as well, called RS+. In addition, OKDo, our single-board computing business, has won a high-profile contract to launch the new BBC micro-bit computer based on being able to offer distribution into new markets. DesignSpark, our engineering community, now has one million members with a piece of content being downloaded every 12 seconds. We will continue to build out our value-added services offering both organically and also inorganically by selectively adding high quality businesses that pass our stringent fit and value criteria following on from the success of IESA. COVID-19 has delivered many challenges, but our steps have never faltered. We have pulled together as a group and even two weeks closure of our DC and Italy led to minimal change in service levels. as if orders were fulfilled out of our DCs elsewhere. Slide 8 shows what changes we are seeing as a result of COVID-19. COVID-19 has fast-tracked trends. COVID has forced us to prioritize within the business on what is most important. We have seen this with our customers and suppliers, too. where we are more aligned than ever before. The accelerated shift in working digitally has driven a double-digit increase in our customer numbers in the first half, even more in customer traffic, as people have gravitated to our site to use digital purchasing systems and e-procurement. Procurement teams are becoming increasingly, they're becoming a more increasingly important part of a company strategy, and good supply relationships have been critical in maintaining procurement operations throughout the pandemic. Supply chains are being rethought, reimagined, and consolidated to use the strongest, most agile and trusted partners, but the most extensive reach, which fits us perfectly. Operationally, we have focused on improving efficiencies and reducing costs, and we're seeing a greater automation of transactional tasks through e-procurement, as well as robotic process automation. Lastly, we are seeing increased focus on supplier codes of conduct, employee protection, and sustainability within business processes. Our ESG considerations are driven by our people and team, overseen and monitored by our management, but embedded throughout all our decisions and into our destination 2025 targets. Customers want to partner with those they trust. And we are doing these things because they're the right things to do and not just to check some box on a scorecard. The world has changed and distribution is changing more rapidly than ever, but we are already there. We are well positioned for the changes we see and anticipate in the future. So let's take a look at the next phase of our journey on slide nine. Ours is a growth strategy that continues to evolve. The first path of the journey was putting the foundations in place, fixing the house. We believe that our improving momentum continues to outperform the market, and that is due to our differentiated offer and outstanding people. So that is why we want to go faster. We want to differentiate further. And we want to leverage our increased scale. We want to be bolder in pursuit of our outperformance. Moving to slide 10, let's be clear. There is no change to our strategy and ambition. We have always been aspirational, but we wanted to fix the house first. We want to simplify further the way we operate. We're flattening the structure and moving to a globally connected but regionally delivered business. We are integrating regional teams across marketing, digital, innovation, and product and supplier management so that expertise can be shared across the group and adapted locally. This will give our management the opportunity to shape their area better to regional needs using globally shared tools. We want to drive higher gross margins by improving the sales mix towards our value-added solutions offer and our own branded RS Pro products. And we also want to work more efficiently by leveraging our distribution capabilities. These initiatives will generate 25 million pounds of net benefits over a two-year period, with the majority in fiscal year 2022 at a cost of 22 million pounds. Detail of the phasing is in the appendix on slide 23. RISE will help us accelerate the opportunities we see to drive further outperformance and support us in achieving our target of a mid-teen operating profit margin. So let's bring what we're doing all together on slide 11. And I'll pause for a moment for you to turn to slide 11. We are well positioned for future growth opportunities. Due to the work over the past five years, We are well positioned. The pandemic has stress tested the business, but it's also fast tracking market trends towards our proposition. Momentum is building as our proposition continues to resonate with customers. We are simplifying our business further to increase agility. Our customer base is increasing. We've doubled our DC capacity in the Americas and will soon do so in Germany. It will be done by next summer, more than likely in June. These two extensions will allow us to substantially increase our breadth of product portfolio, including our private label offer. We have strengthened our relationships with customers and suppliers and continue to add more on both fronts. We continue to invest in our team, and we want to unleash the talent unleashed the potential that we have that exists around the group to allow everyone to take ownership. We have a very strong balance sheet and we've managed cash well. So with all that in place, as we look forward to the next five years, I believe we have the potential to transform this business again. And I am more confident in the model today, more so than I've ever been, And I'm also more confident in our people than I've ever been. And now, over to David for the financial results.

Thanks, Linsley, and good morning, everyone. Turning first to the financial highlights, which is on slide 13 of the presentation. Group like-to-like revenue fell 7.3% in the first half. We delivered a significant improvement in the second quarter to minus 4% from the minus 11% seen in quarter one. We have continued to outperform versus the market and take market share. This has been driven by our core underlying product and service offering. Our trading has not benefited from any material PPE and safety related products. Today this category accounts for less than 3% of the group's revenue. Digital, which accounted for 62% of group revenue, grew broadly in line with the group over the first half, but outperformed by 1.4 percentage points in the second quarter. Our digital performance was temporarily affected at the start of COVID-19 by a fall in corporate customer orders, but demand returned as we moved into quarter two. we saw good growth in both website visits and in new customers during the period. RS Pro returned to growth in June and has continued to outperform the group, delivering 8% like-for-like revenue growth in quarter two and 2% for the first half. This has been driven by product launches, digital marketing, and being more proactive in our sales and marketing approach. Adjusted operating profit fell 26.5% as we experienced a decline in demand, as well as incurred additional costs relating to COVID. We saw strong cash flow generation as we took actions to conserve cash, with adjusted free cash flow of $85 million in the period. Our return on capital employed for the period is 20.7%. Whilst this is down from the 23.5% in the prior year, we have continued to invest in the medium and long-term priorities of the group, ensuring discipline around capital allocation. With strong cash flow and continuing capital allocation discipline, our balance sheet remains strong, with net debt to EBITDA falling to 0.5 times. As a result of the resiliency The group has shown over the past months our robust trading position and strong balance sheet. We have reviewed our position on dividends. We've decided to pay the previously deferred final dividend for the year-ended 31st of March 2020 at the same level as the March 2019 final dividend of 9.5 pence per share. This dividend will be paid on the 18th of December 2020. In addition, in the normal course, the interim dividend is equivalent to approximately 40% of the prior year full year dividend. As such, we will pay an interim dividend for the year ending 31st of March 2021 of 6.1 pence per share. This dividend will be paid on the 29th of January 2021. Let's look in a bit more detail at the summary income statement on slide 14. Revenue fell 7.1% to $908 million, or 7.3% on a like-for-like basis. The gross margin was down .5 points to 43.2%. Excluding COVID-19 impact, the gross margin saw an improvement driven by pricing initiatives, discount discipline, and some mixed benefits. However, we saw two pressures from COVID-19. Firstly, additional inventory provisions. This was from slower moving inventory through the pandemic and price declines of certain PPE products now that supply is more plentiful. And the second pressure has been higher inbound freight costs. Adjusted operating costs fell by 2.1% on a like-for-like basis, driven by lower volumes, labor savings, digital advertising efficiencies, and lower regional offline marketing. The group did not make any furlough claims in the UK. However, there was an additional 8.8 million of COVID-19-related costs, and this stemmed from increased outbound freight costs and labor inefficiencies as we adhered to social distancing within both our DCs and office environments. Adjusted operating profit margin fell 2.3 points to 8.5%, and our adjusted profit before tax of 74.3 million was down 28.1% on the prior year. Excluded from our adjusted profit are charges of 18.7 million, and these relate to the rise reorganization costs of 16 million and 2.7 million of amortization of acquired intangible assets. For the period, the adjusted tax rate was 23% down slightly on the prior year of 23.3%. Turning now to our regional performance on slide 15. Starting with EMEA, we saw 8% like-for-like revenue decline in the first half. We grew market share in all sub-regions despite the difficult economic backdrop. Digital for EMEA, which accounts 74% of the region's revenue outperformed the region by 1.9 percentage points. As a result of lower revenue, operating profit fell by 22.8% on the like-for-like basis. Looking at the subregions of EMEA, we have taken significant market share in Northern Europe. aided by the higher proportion of value-added solutions integrated into our offer. The UK remained relatively resilient with a significant improvement in momentum during quarter two. The strongest growth was from small to medium-sized customers due to our strong digital proposition and strength of our inventory availability. The IESA value-added solutions model has remained robust throughout the period. Whilst we've seen a small number of large corporate customers decrease their trading due to their end market, we have seen many others either maintain or increase their spend through this model. In addition, AESA has both a strong prospects pipeline as well as some new client wins, including some international contracts. Southern Europe performed well and saw a significant improvement in trading from Q1 into Q2, as the most severe lockdown restrictions in April unwound, leading to a strong recovery. We continue to grow market share in all countries within this subregion. Central Europe saw a small improvement in trading from Q1 into Q2. Our German business is heavily focused on the OEM automotive and electronic subcontractor segments, areas of the market that have been significantly impacted by reduced capital budgets. We saw minimal improvement in momentum during the half. We continue to make changes to our operations and have invested in our sales force. The Americas saw a 7.8% decline in like-for-like revenue during the half, with a small improvement in Q2. Automation and control, which is driven more by larger CapEx programs, continues to play a significant role in the allied proposition, which we believe explains the more measured recovery. The Americas operating profit was down 27% on the like-for-like basis within the period. We continue to invest in our sales force and have better aligned our teams to revenue and gross margin growth. Our nearly extended DC provides a significant increase in capacity and allows us to broaden our range more into the MRO market. Moving on to Asia Pacific, we saw a 2% decline in like-for-like revenue during the first half. Performance was a little mixed and varies by country, but this was predominantly driven by the extent of COVID-19 lockdowns. Greater China has seen growth, excluding OK Do, every month, even during the height of COVID-19, as it benefited from a more focused sales force. Meanwhile, Japan has underperformed, primarily due to our electronic exposure. Asia Pacific reported flat operating profits due to the tight control of overheads and labor costs. And given the circumstances, we're actually very pleased with that performance. Now moving on to the cash flow on slide 16. Adjusted free cash flow of 85 million was materially better than last year due to a smaller investment in inventories and improvements in other working capital. Working capital as a percentage of revenue improved by 90 basis points to 23% whilst inventory term remained unchanged at 2.5 times. As a result, adjusted operating cash flow conversion increased to 132.5% from 42.3% in the prior year. Net capex decreased to 25.5 million from 37.2 million last year. During the first half, we deferred or slowed some projects to conserve cash while ensuring that the delays would not impact the delivery of our medium to long-term strategy. Our CapEx spend concentrated on expanding our DCs in the Americas and Germany, as well as our technology platform, which included the development and launch of our new RS mobile first responsive website. Due to the reduction in spend, the CapEx depreciation ratio fell to 2.1 times but it's still well above our typical maintenance equivalent of one to one and a half times. Our full year cap expense is likely to be around 60 million. Onto the balance sheet, which is on slide 17. As of the 30th of September 2020, our net debt fell to 114.8 million, including IFRS 16 lease liabilities of 57.9 million. This was down from the 189.8 million at the year end in March, and this was due to improved free cash flow, plus no final dividend having been paid during the period. Even aid to interest is around 25 times. We have significant headroom against our banking covenants, which are detailed on the slide. As of the 30th of September, we have committed facilities of $446 million, of which $289 million remains undrawn. Now moving on to current trading on slide 18. Over the first five weeks of the second half, we have continued to see momentum across all regions. We saw market share gains in industrial and continued positive growth in RS Pro. However, we remain acutely aware of the challenges and uncertainty we all face as we navigate through this global pandemic. With further lockdown restrictions in some of our key markets, meaning COVID-19 related costs are unlikely to ease slightly as previously hoped. Thus, although we are confident about the strength of our business, we remain cautious about the economic backdrop and short-term uncertainties. And so with that, I will now hand you back to Lindley.

Thank you very much, David. To finish on slide 20, we are ready. And let me be very clear, and this isn't a, hey, coach, we're ready, put us in the game. We're not on the sidelines. We're not in the stands. We're in the game. We're not playing defense. We're playing offense. We're not using the pandemic as an excuse to When we say it's business as usual, that does not mean that the health and well-being of our employees is not still our number one priority because it is. And that starts with me and taking better care of myself, which I have been. And I can assure you I feel better than I felt in the last 30 years, and I'm more motivated than ever. So we can see we've weathered the pandemic well, but, of course, the pandemic is far from over. We know we're outperforming the market, and we must continue to outperform the market. And when I look around this business, I can see that our proposition is resonating with our customers and our suppliers. But you know what? Most importantly, especially with our people. We're facing in the right direction in terms of this changing world, and we've built a strong, resilient business. But I do understand the environment we face and the uncertainty there is. This is a very tough economic situation, and it's likely to get worse given the second lockdown, the unrest we see around the world, and the many countries that we operate. We can see businesses struggling. We know eventually government subsidies might subside. And we know the competition is not going to be standing still either. The difference this time is we know we can trade well through it. We know where to put our priorities, and we also know what is most important to our customers and suppliers, and most importantly, we know we have an aligned leadership team. We have an aligned leadership team across the business, as well as an aligned board of directors. And the reason for that confidence, as I've said, is down to our people. We have changed all the top management within the last five years, and in my view, We have the strongest team I've ever seen in my 30 plus years within this industry. We have leaders that we can see are making a difference. They're not watching what's happening or wondering what's happening. They're out making things happen and they want to aim higher. They want to be more aspirational. We are empowering our teams to drive decisions quicker and take more responsibility. In this ever-changing world we live in today, we need to move forward, building on what we have rather than sitting still. This is about being proactive, not reactive, not sitting back waiting for the market to come to us, but creating the market. The building blocks are in place to grow faster, and rest assured, we will. Now is the time to rise to the future and accelerate. Lastly, I'd like to welcome Baroness Rona Fairhead today. Rona joined the board on the 1st of November as a non-executive director and will become chairman on the 1st of February 2021 to succeed Peter Johnson when he steps down. I'd like to thank Peter for everything he has done for Electric Components as we have turned this business around and the support he has also given to me personally. He has been a wise counsel. offered challenge when needed, and ensured we remain bold. He has aimed high and has been committed to us delivering our focus on being first choice for our customers, our suppliers, and our people. He's also been a true friend to me and will always remain a true friend. And I'm looking forward to working with Rona as chairman, and I'm more certain than ever that we will succeed. She shares our optimism and ambitions for the future as we keep making amazing happen and brings also a tremendous range of commercial and strategic experience to our company that will help us drive forward at pace. Now I'd like to pass it back to the operator to open up the conference call line for Q&A. Thank you.

Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure you are unmuted locally.

Ruby, I just wanted to point out, before you get to questions, I wanted to point out that what I said was ensure Peter made sure that we ensure that we were bold. But it sounded like I said ensure that we're old. And I say that because I just turned 50. But I just want to clarify that was bold. But the one thing I do want to highlight to everyone on the Q&A slide on slide 21, that's actually our Bad Hurstville facility. And you can see how far along it is to completion. I just want to point out on top of that, you'll see solar panels. And in the back of this index, you'll see an ESG slide. The numbers actually refer to the United Nations numbering of what they have within their package related to ESG. So for us, you know, ESG isn't just some fluffy buzzword. We're really focused on it, and not just the social side, which we do quite a bit on the social side, but the solar panels just highlight what we're doing to achieve neutrality from a carbon standpoint in the not-too-distant future. So, Ruby, we'll continue with questions.

Our first question is from Henry Carver of Peelhunter. Your line is now open. Please go ahead.

Thanks. Good morning, guys, and good to hear you sounding so well, Liz Lee. Just a query on the sort of the fact that COVID, you know, would have changed behavior, customer behavior and accelerated change in that regard. I just wanted to know if there's any sort of tangible evidence of that where your customers have sort of shifted to digital and said, we are going to keep it this way. Or if it's just a sort of, a feel for customer behavior and whether, you know, when we go back to normal, you will, you know, you will see actually behaviors sort of go back to how they were and you'll need more sort of face-to-face stores. Yeah, just any more sort of commentary around that would be really useful, thanks.

Yeah, no, Henry, that's a really good question. And I would say, let me make three comments on that. Number one, as it relates to COVID, We've got 7,000 parts in our personal protection equipment portfolio, so it's not a significant area of focus today for us. I think moving forward as we expand out our product portfolio, we'll do so more in safety products because it fits what our customers are buying. So, one, we don't have a huge upside in PPE, which means in the future we're not going to see a big lapse over those numbers like some of our competitors did. have seen. Two, because of the fact customers have been so focused on PPE, we've seen a nearly 40% increase in B2C traffic. So we've seen a lot of what we call private customers, and we've seen a lot of consumers that have come to our websites and an increase in traffic. That's taken our average order value down as a company. And I wouldn't say they're the most profitable customer set. I would say what's changed in the future is the need not to eliminate that customer segment, but to find a way to make it more profitable. And why do I say it's not profitable? Because at average order values of less than 30 pounds, When you pay freight and you handle material the way we handle material, we're not making money. So we've got to find a way to make money in that segment. The third comment I would make is I think some of the changes with COVID certainly will change and define new norms. But I do expect in many cases, face to face meetings to resume when there is normalcy that resumes in the marketplace. But who knows how long this is going to last? You know, if only half the people with a vaccine, there's a lot of excitement around vaccines right now in the markets are reacting. But how many people are actually going to take the vaccine? So if you're going to stay in this market, let's say this continues for another six, nine, 12 months. For us, we have to adapt to this as business as usual. We have to learn to sell virtually. We have to learn to do field sales calls online, and that's exactly what we're doing. So I think some of this will stick. I was talking to a friend that's the CEO of a major company here in the U.S., and he said, you know, I look forward to not doing any roadshows anymore and just doing them virtually because they seem to be equally, if not more, beneficial than in the past. So I think we'll see over the coming years what happens, but either way, we're very well prepared. And I think what it does change is it changes the importance of health and safety, and it puts that right at the forefront. It's not about price and saving money on masks and gloves and those things that protect employees, but it's about the availability and making sure you have the right levels of stock. If anything, our customers have cut back way too far on inventory, so we're seeing some inventory builds again. From a maintenance standpoint, once operations kick back in, they have the products available to immediately fix line as opposed to having to order products and people home, employees home. So I think it's actually building a more robust supply chain, which fits right into our value propositions.

And so will it mean that you will be able to have fewer sort of local sales guys and trade counters, or is that footprint not something that you'd look at changing as a result of COVID?

No, I think that adds to the stickiness of the relationship with customers, you know, having that physical presence. You know, it's a combination of both. People available, live chat, available to answer technical questions. The value-added solutions, often you've got to be in the facility. You've got to touch. You've got to feel it. You've got to see it. You've got to be able to look at lines. You've got to be identifying the problems. And when you think of anything, it brings more value to what we've done. I think customers have realized, like, you know, hey, look, we're not just doing this on our own. We need a partner like an RS or an Ally to be able to come in here or an IESA to come in here and and to help us make our operations more efficient. So I think it goes the opposite way. I think it enhances that stickiness factor and adding more value, as I had on one of the slides we discussed, which to me is that digital moat. You've got to be really, in this business, in this omni-channel business, you've got to deliver customers what they want, but you've got to add more value. You've got to do so the way customers want it done in terms of how you deliver the product, whether it's on the web or e-procurement or it's a fax order. You know, we still get more than 100,000 fax orders a year, or whether it's an email or a phone call or an order on a napkin. You know, we do it the way customers want us to do it. But I think what we're going to see is when we move forward, is we're going to see greater use of digital technologies, greater use of e-procurement, but a greater requirement for value-added solutions at the same time.

That's brilliant. Thanks, Lyndon. We much appreciate it. Thank you, Henry.

Our next question is from David Brockton of Numis. Your line is now open. Please go ahead.

Oh, good morning. I've got two, please. Firstly, in the presentation, you touched on perhaps a greater opportunity for inorganic expansion, potentially for some value-added solutions. I just wondered if you could just touch on in terms of what you could be looking for, either in terms of is this capability expansion, is this regional expansion? That's the first question. The second question relates to the USDC. Now that's sort of up and running. What's the sort of next steps in terms of prioritizing range expansion? Is this sort of now a more concerted move into MRO? Should we expect to see more RS Pro there? Just keen for any insights. Thank you.

Yeah, thank you, David. Good questions. I think, first of all, in regards to the inorganic expansion around value-added solutions, our message has been pretty consistent over the last couple of years. that our focus is meant to deliver what customers want while adding more value the way customers want it. That was phase one of the journey. And when I say while adding more value, we talked about digestible bolt-ons around value-added solutions, product expansion, geographic expansion. And that priority. So the first two acquisitions that we had done in 20 years were around value-added solutions. So we see the first opportunity being value-added solutions in the first instance in terms of inorganic. The second phase of this journey, we talk about adding scale and transformation, being bolder in our pursuit of outperforming. That means substantially expanding the product portfolio and substantially expanding our customers and building scale, not for the sake of scale itself, but for the sake of actually building a greater moat around that e-commerce side of the business and value-added solutions. So I would say from a value-added solution standpoint, it's both expanding regionally, to your point, as well as adding incremental capability to the suite of services we have. What you'll see from this in the future is a differentiated presentation as we move into May with the priorities around the value-added solutions we want to offer and that we are currently offering. There's a lot we don't talk about on these calls because we're in beta mode or test mode, but we're very clear in terms of the journey we're taking from a value-added standpoint. It enhances the stickiness of customers and makes customers more loyal. And we know by becoming first choice, which is our vision, it on average adds 25% more business to our relationship. So value-added solutions is a very important part of that. The second part of your question is it relates to the United States Distribution Center. I've recently had a meeting with our U.S. team, socially distanced, wearing masks, of course. And for anyone that wants masks, we have plenty in stock. So please, by all means, order from us. In the U.S. distribution center, our number one priority is expanding our automation and controls portfolio, so our existing priority in terms of our business. But we will move into other categories, and I believe there's 13 product categories we can disrupt with our business model. We'll expand. We'll offer products that our customers will buy. There's an old saying in distribution, which is well-bought. half sold. I turn that around and I say well sold, half bought. So what is it that our existing customers want to buy for us at a reasonable profit margin, because just to stock and sell at a low margin adds no value to us, but at a reasonable profit margin, which means at the average margin or higher, And they're willing, and they will buy from us. So not just they say they're willing to buy from us, but they will buy from us. So that's the way we're approaching it. We have a roadmap. We've actually signed so far in the last six months during the pandemic, 10 electronics lines. We've signed about the same when it comes to industrial lines as well. So we'll continue to add lines. We'll continue to add products to the existing franchises that we do have. You'll see the same thing as we move forward in Germany. But we're not going to wait until the D.C. is finished. We'll start that well in advance of the completion of the distribution center, which means we're starting this conversation now.

Thanks very much.

David, it's David Egan here. If I could just add one little bit to the D.C. We certainly see RS Pro as a key and an important element of some of that expansion as well. So RS Pro in the U.S. still remains a very small element of our proposition. So we're looking to bring as many of the RS-Pro products into the new DC and into the offer of the U.S. operations going forward as well.

Great. Thank you.

Our next question is from Dean Marden of Jefferies. Your line is now open. Please go ahead.

Morning all. My first question actually is an adjunct to the previous one on the U.S. distribution center. Can you help us understand what's the limiting factor to scale the inventory build in that facility? So is it managing the impact on short-term profitability? Is it relationship with suppliers to basically get your hands on the SKUs? Or is it people or something else? So just try and understand how that builds over the next year or two. Then secondly, you also talk a lot about digital assets. and online these days. I'm wondering, is there still the potential for you to scale your vending business in an omnichannel world? And then, thirdly, just a couple of quick balance sheet questions. It's all pretty straightforward. Firstly, has the better-than-expected free cash flow in the first half changed your view about the timing of the £25 million pension top-up? And then, secondly... Should we expect you to refinance your Revolver next year? And if so, could you just give us a quick reminder, David, please, about what your current credit spread is, please?

So let me start with the first question. And then for the sake of David staying with the company, I will stay away from the cash flow and the financial questions because I like them too much. So first of all, let's talk about the USDC expansion. This is not related to suppliers. You know, if it's up to suppliers, we would stock every single product they have that maybe even some they haven't sold in a few years that might have them be on their shelf. They'd shift it to our shelf. And that's not a knock on suppliers. That's just the natural way of how things happen in this business. So the first thing we have to do, as I said earlier, you know, well sold, half bought. We have to make sure that we understand working from the customer backwards. And existing customers are the best customer. Loyal customers that you currently have are your best customer. Now, we want to expand our customer base. We want to expand our customer base in the focused product segment, which means we start there and look at how we broaden our portfolio. The only limiting factor that we really have, Kenan, is actually receiving products. So we've got to continue to grow organically while we continue to add new products to the portfolio and grow from an organic standpoint on that front. So really the only limiting factor we have is the ability to receive products and to receive thousands and thousands of additional products every day put in the stock. At this point, that hasn't been an issue, even through COVID. So we'll continue to expand that. But we don't want to just put it on the shelf. We want to sell it. So we have to stay balanced from a turns perspective. So we've got turns goals. We've got budgets. We've got a strategy on that front, so we don't feel the need to go out and just add 300,000 parts overnight for the sake of filling the distribution center and products that we won't sell. We want to make sure they're products we do sell, so we've got to make sure we leverage the data that we have, information, the knowledge, the wisdom, or insight to be able to drive the right decisions. So that's number one. Two, as it relates to digital and you brought up vending, I think on the digital front, we continue to make substantial investments in digital, from find and search, which tends to be the weakest part of the journey for customers where they're looking for a product, maybe they don't know what they're looking for and they can only put in a description. So that's an area every company has to continue to invest in, through the pay-per-click, the SEO, the pay-per-click search engine optimization, pay-per-click being... paid search, the return on advertising spend is a key metric there, but now we're looking at long-term value and doing that based on profit, not just sales, in terms of how we make investments there. So we're becoming much more intelligent using data to lead to insight to make proper decisions on that front. SEO, search engine optimization, continues to be a huge focus. Check out personalization, understanding customers' behaviors, doing more product boosting, associative sales. So we're still on this digital journey. And although it's 62%, 63% of our global sales, our goal longer term is to get it to 80%. So the web itself is very important. A lot of people now are saying the word technovation instead of digital. So for us, we've gone from digital as a department to channel to where we really want digital to be part of the culture of this company. When you get into vending solutions, I don't really see that as digital. I see that more as a value-added solution. We're testing that right now in three countries. We're building scale in that area. It's just a very important part of having products like safety products, other products on-site where the customer can go to a vending machine. They can get the product, pull it from the machine, and track the usage of those products. So it's a great opportunity for us. specifically in Europe where there's not a dominant player like Fastenal in the U.S. Fastenal has done an outstanding job, but then definitely an opportunity, one of which we're investing in as are others, but we're doing it relatively slowly to make sure the return is there and that we don't make the mistake of just giving vending machines away for the sake of building a number, but that it's tied into an overall profitable growth strategy. And that starts more with larger customers and larger customers for us tend to exist within IESA and our integrated supply side. As far as the financial questions, cash flow, the top-up in regards to the pension, I will defer to Mr. Egan on that front.

Thanks, Lindsay. On the pension top-up, our obligation is $25 million by the end of next financial year. At this stage, we haven't. We haven't made any commitment in terms of the timing of that, but I think it's probably highly likely given the reinstatement of our dividends that we will offer to the trustees to pay a portion of that $25 million in the current financial year. So I think possibly around $10 million probably in the current financial year. To be fair, I have not spoken to the trustees and we'll do that later this afternoon. In terms of the RCF, we have $190 million or thereabouts of RCF That's due to expire in 2022. We are sort of in the process of looking at refinancing the RCS, but we haven't got anything definitive to say yet, but we'll do so when we're ready. Sorry to press you, David, but the current spread that you pay on the RCS? It varies, but the all-in cost is... It varies depending upon the net debt, but it's less than 3%. It's cheaper than our PP. Yeah. Sorry, is that the spread or the all-in cost? The all-in cost. Brilliant. Thanks very much for that. And please pass on our best wishes to Peter as well for all the good work over the last five, six years. Certainly. Thank you.

Thanks. Thank you very much, Keenan. Just want to point out that David got a lot more, gave a lot more information on the pension than I would have. Ruby, next question.

We currently have no further questions, but I will reiterate, should anyone wish to ask one, it is star followed by one on your telephone keypad. We have a question from Jane Sparrow of Barclays. Your line is now open. Please go ahead.

Morning. Thanks very much for the presentation. It was just one on, I think when you gave your presentation five years ago, Lindsley, and you talked about regional accountability. I think one of the things you talked about at that time was sort of people in Oxford making decisions on things like marketing in China. And so just wanted you to sort of reassure us that as you squash that pyramid a level further in EMEA and consolidate group and local teams into areas like marketing and product management, et cetera, how you ensure you maintain that sort of local accountability and local knowledge that's driven so many good decisions over the last few years?

Yeah, you know what, Jane, that's a fantastic question, and thank you for bringing up November of 2015, because if you remember at that time, it wasn't about a fluffy strategy. In fact, I didn't use the word strategy once in that presentation. It was all about execution. And we talked at that point in November 2015 about three key priorities. One was putting the customer at the heart of everything we do. Two was driving accountability. And three was operating for less. So as we look forward, and exactly to your point, what we've been doing is we've gone from this highly centralized global model, like you said, in Oxford with having people in Japan reporting to people in Germany that reported to people in Oxford. We've flattened that structure, but we've taken it kind of halfway because we didn't have the right leaders. We didn't have enough of the right leaders in place. to be able to make it happen at the time. We weren't able to go all the way to where we wanted to go. That's where we've gone now. So there still are people in local markets, but they're regionally coordinated. So they report into regional teams so that they can share best practices in a common language. And that's exactly what we've done everywhere around the world. So I would say we have the most effective model that we've ever had. The collaboration is at an all-time high. And those three key philosophical principles that we had at the time that were actionable around putting the customer back in the heart of what we do, you can see the results in the NPS scores, driving accountability into the business. We have almost the same number of people now that we did then with twice the revenue and four times the profit, notwithstanding you're taking out the COVID impact. So quite proud of that. So we've been able to operate for less. We've been able to do that by putting accountability in the business, by making decisions where they should be made. Now, there's some cases, you know, we don't talk about shared business services, but we have close to 600 people now centralized in shared business service functions with more than 50 RPA processes that we're using to benefit the company now that drives a much greater efficiency overall. So I couldn't be more proud of the team. We have what's called an amazing leaders framework right now that's focused on, you that have humility, leaders they trust, and leaders that are passionate about the business. And that's where we are today, and that's where our leadership is today. And I couldn't be more proud of the way we've responded to the pandemic, the way we're not using excuses of the pandemic for performance and the way we're driving forward, but still keeping our focus on the health and safety of our employees and making sure they're protected and their families are protected and those around them are protected. So that's where we are right now, Jane, and congratulations on your win over the weekend.

Thanks very much. Thanks, Lindsay.

We currently have no further questions, so I will hand back to your host.

Thank you very much, Ruby, and thank you all for being on this call. As always, we're available. I just want to highlight one last point, and that is communication. We're open to talk to anyone at any point in time. Within our company, we have a daily call between myself and David and a few others. Every two weeks, we have a call with our senior leadership team across the business, the top 20 leaders. And then every month, we have a call, a business update with the top 300 leaders. And then I do weekly podcasts. We have a monthly board call. So I think the communication within our company is at an all-time high. and I hope we can continue this level of communication as we move forward, collaborations at an all-time high. I'm convinced now more than ever we will emerge stronger from this pandemic than we've ever been in the history of this company. So thank you for taking the time to listen on this call today from wherever you are in the world, and we look forward to your support moving forward as always. Call us if you need us. We're here, and thanks for being on the call this morning. Thank you very much. Thank you, Ruby.