RS Group PLC

Good morning, everyone, and welcome to the virtual 2021 preliminary results presentation for Electro Components for the year end of the 31st of March 2021. I'm Lucy Sharma, responsible for Investor Relations at Electro Components. If you are dialing in through the phone line, you can find our presentation slides on our website under the Investor Relations link. I'd like to introduce you to Lindsay Ruth, our CEO, and David Egan, our CFO. Over to you, Lindsay.

Thank you very much, Lucy. And after such an extraordinary year, I'd like to begin by talking about what underpins our success at Electro Components, and that is our people. Our amazing team has driven our strong performance this year, working tirelessly and collaboratively to support our customers, suppliers, communities, and each other. Special mention goes to the essential workers in our distribution centers, who came into work every day despite the lockdown to ensure ongoing service and continue to do so. We have been supporting our communities too. For example, setting up 3D printing farms for personal protective equipment, PPE, designing personal ventilators, and providing free educational tools for homeschooling. I'm incredibly proud of how strong our team is. I thank everyone for their hard work, positive attitude, and Humir, which continues to make electric components the amazing business I'm proud to lead. So turning to slide five, our Destination 2025 strategy outlined two years ago sets out our five strategic priorities to deliver value to all our stakeholders by becoming first choice, our vision. This strategic roadmap has been driving our market outperformance and is guiding our actions going forward. It is a plan based on five key principles. One, delivering the best customer and supplier experience. Two, investing in our talent to maintain a high-performance team. Three, continuously improving how we do things to build operational excellence. Four, driving innovation, be this within product and service solutions or harnessing our digital expertise. And five, reinvesting to accelerate growth, both organic and inorganic. There is no change to the overall plan, but we have refocused our efforts to deliver these ambitions faster. Destination 2025 is about driving profitable market share growth towards our goal of a mid-teen adjusted operating profit margin. I will now hand it over to David to take you through our financial performance.

Thank you, Lindsay. And good morning, everyone. And thank you for joining our preliminary results presentation. Let me start by giving you the key messages from the results on slide seven. We delivered a strong performance during FY21 with momentum building through the year after the onset of the global lockdowns from COVID-19 in March 2020. Key for me is how we have proven the strength and resilience of the business in extreme circumstances and had the ability to improve our competitive position. We believe these factors plus our differentiated offer and financial strength drove the significant market share gains that we have seen. During the year, we took a step forward in our inorganic strategy, making three high-quality strategic acquisitions that are all performing well. Acquisitions will help us to accelerate our strategy and we have an active pipeline of further targets, but we will remain disciplined and selective in our approach. And finally, we delivered strong free cash flow and with ongoing rigorous capital discipline generated strong investment returns. Slide 8 illustrates our financial highlights. Full year like-for-like revenue growth was up 1.4%. It fell 7.3% in the first half as COVID-19 hit, improving to a positive 10.2% in the second as lockdown restrictions eased and the strength of our model and our customer proposition shone through. Our main own brand, RS Pro, continues to outperform the group with like-for-like revenue growth of 9.7%. Digital like-for-like revenue growth of 0.9% was lower than the overall group due to less e-procurement revenue from some large customers. Pure web sales, which is a truer measure of our digital proposition and customer traffic, grew at 2.4%. Our adjusted operating profit margin fell by 1.9 percentage points predominantly due to inventory provisions and additional cost relating to COVID and Brexit. Despite this, our return on capital employed remains strong at over 19%. During the year, we focused on conserving cash, delivering adjusted free cash flow of 145 million, even after an additional 12.5 million payment into our UK pension scheme, and no real slowing of our capital investment program. Accordingly, We reinstated our progressive dividend policy and increased our full-year dividend by 3.2% to 15.9 pence. We have seven non-financial KPIs which relate to our ESG ambitions, which Lindsley will address later. So turning to slide nine, I will detail four of them. Our CO2 emission intensity improved by 36.5% to 3.3 tonnes per million pounds revenue. In fact, that is a 62% reduction in tons of CO2 since FY15. Customer experience remains a core focus for the business and a key performance metric for our teams. Our group rolling 12-month net promoter score was 54.4. Despite all of our team's hard work, we could not fully mitigate the impact of product shortages and longer lead times from COVID and Brexit. Improving NPS is a key focus for us all going forward. Our employee engagement score grew to 74 as our teams worked hard in keeping our people safe, connected and healthy. And our accident rate fell by 36%, resulting from safer working within our distribution centres. Slide 10 details the income statement. Like-to-like revenue growth was 1.4%. Total revenue grew by 2.5%, with acquisitions accounting for 1.5 percentage points of the overall growth. The gross margin decreased by 1 percentage point to 42.7%, which includes a 0.6 percentage point impact from inventory provisions on certain PPE products as prices fell. with the remainder being higher inbound freight costs and a geographic and product mix effect. Outside of gross margin, costs relating to COVID were circa $17 million, with Brexit another circa $2 million, reflecting increased freight costs, brokerage fees and a higher cost to serve. Many of these costs have continued into the current year, although we should see reduced brokerage fees when our distribution centre expansion in Germany comes on stream in early autumn. Our RISE initiative to streamline and simplify the group delivered 7 million of benefit and is on track to deliver the full 25 million of benefit over a two-year period. There was an 11 million substantial reorganisation cost, less than the charge booked in the first half As some plans were stopped due to Brexit, more people with less service years left, and we redeployed people from redundant roles into vacant positions. The three acquisitions contributed 29 million of revenue and 2 million of adjusted operating profit since joining the group. Our adjusted effective tax rate was 21.8% in line with last year, helped by circa one percentage point from one-off tax credits, which are unlikely to repeat. Looking forward, we expect the FY22 tax rate to rise to circa 24%, with further increases in the outer years as the effect of corporate income tax rate increases in both the UK and the US come into effect. On slide 11, we see that all regions had positive like-for-like revenue growth. Industrial production data shows our core markets gained share, as can be seen on a chart in the appendix. We provided revenue data at our trading update on the 13th of April, so I will concentrate on the profit metrics within this presentation. Starting first with EMEA, which accounts for circa 64% of group revenue. Like-for-like revenue was 1% up during the year, with nearly an 18 percentage point swing in performance between the two halves. The gross margin decline was largely due to the inventory provision on certain PPE products. Operating profit fell by circa 15%, a result of the lower gross margin and $13 million of extra costs associated with COVID and Brexit. the operating profit margin was 13.5%. Needless and Liscombe, our two PPE acquisitions in the UK, contributed $1.6 million to the profitability within the EMEA region. The Americas, which is circa 26% of group revenue, saw like-for-like revenue grow by 1.4%, with a circa 19% swing in performance between the two halves. There's been a lot of change within our America's business over the last two years. We've transformed our senior management and sales force teams. We've doubled the capacity of the distribution center, refocused our marketing initiatives, and acquired Synovos. We're starting to see the benefits coming through from this repositioning. The gross margin rose due to less discounting and better price optimization. offsetting the inbound freight inflation. Operating profit declined by 8%, with higher operating costs relating to supply chain, labor, and depreciation from the DC investment. The operating profit margin was 10%. Synovus contributed 0.5 million of operating profit since its acquisition in mid-January. And finally, Asia-Pacific, which accounts for circa 10% of group revenue, saw like-for-like revenue grow by 4.6%, with a 13% swing from the first half into the second. We have broadened our product offer, restructured our country operations, and refocused our sales force. The gross margin declined largely due to a mix effect from stronger revenue from lower gross margin product. The operating profit fell to $1.4 million, with a higher cost on a small profit base more than offsetting the revenue growth. On slide 12, we detail our adjusted free cash flow of $145 million, which benefits from tight working capital control. Our working capital to revenue ratio was 21.8% for the year, a great performance. Inventory turn was 2.7 times. with delays in receiving product due to Brexit and the Suez Canal blockage. Net capital expenditure was $55 million, as we focused investments on key value levers, such as our distribution center expansions and technology platforms. Our expanded DC and Fort Worth US was completed in the first half, and we continue to invest in expanding our distribution center in Bad Hersfeld, Germany. We anticipate capital expenditure in FY22 to be circa 65 million pounds. We delivered 100% adjusted operating cash flow conversion during the year, providing strong financial support for our investment program. During the year, we acquired three strategic businesses, detailed on slide 13. Synovos is a leading player in integrated supply solutions based in the US and very similar to our IESA business. We see significant cross-selling synergies between Synovos, IESA, Allied and RS Pro. Needless and Liskam expand our product and services solutions offer in safety, hygiene and PPE, allowing us to capture a greater share of spend with new and existing customers. All three acquisitions are performing in line with expectations with integration and cross-selling opportunities on track. Our pipeline of acquisition opportunities remains strong. On slide 14, we note how we are optimizing our capital allocation. During the year, we delivered strong cash generation, refinanced and increased our debt facilities, and raised equity to fund our acquisitions. Given our strong performance, the Board resumed our progressive dividend policy, paying a deferred final dividend from last year in December 2020. We returned to our normal dividend timetable this year, paying an interim dividend in January, and the Board proposes a 9.8 pence per share final dividend policy, giving a full-year dividend of 15.9 pence and dividend cover of two times. The group's financial metrics remain strong, with net debt to adjusted EBITDA of 0.5 times, providing us with the financial base to support both organic and inorganic growth investment. Moving to slide 15 and current trading. The first seven weeks of FY22 have seen very strong growth, but attempts on either a one- or two-year view provide good tailings. On a one-year basis, this is due to weaker comps from the first COVID-19 lockdown, and on a two-year view, we saw a very slow start to the year, particularly within the Americas. Looking at our current performance on a two-year view, revenue growth remains robust, at broadly low double-digit CAGR. Our performance in the Americas continues to benefit from a wider product range, improved digital performance, and much easier comps. We're particularly pleased with the robust performance in EMEA, given ongoing lockdowns and the logistical challenges presented by Brexit. And Asia-Pacific remains strong, helped somewhat by the buoyant electronics market. We're mindful of ongoing uncertainty regarding COVID-19 and its variants, continuing cost pressures relating to freight inflation and Brexit, currency headwinds, thus the potential for some supply chain constraints later in the year. However, we're well positioned to make good progress this year, and our expectations for strong growth in FY22 remain unchanged. With that, I'll hand you back to Lindsley to go through our strategic opportunities. Over to you, Lindsley.

Thank you, David. So turning to slide 17 and the significant growth opportunities we have, I'd like to talk about three things today. The four needle movers that will drive top line and market share growth, how we can do better at the basics to drive operational leverage, and how we are accelerating our growth opportunities through acquisitions, that strategically and culturally fit and financially add value. Combining all three will drive profitable market share growth and improve operating efficiencies to achieve our goal of a mid-teen adjusted operating profit margin. Slide 18 lists four needle movers underpinning our market share growth. One, our product and service solutions proposition where we work in partnership with our customers to deliver sustainable cost efficiencies. Two, a strong customer experience through our omni-channel offer to deliver a frictional service. Three, our unrivaled breadth of product choice and industry-leading availability providing security and supply. And four, our specialist known brand RS Pro products, which widens our offer and improves our margins. These are all delivering our outperformance versus peers, a testament to the hard work of our people who are driving this. So what are we doing within each area to leverage our advantage further? We move to slide 19. We're competing smarter through our product and service solutions. Our customers want solutions to their procurement problems from a trusted partner that understands their business. Our expanding service solutions offer moves us beyond pure product distribution, differentiating us against transactional peers and improving customer loyalty and ultimately customer lifetime value. And when we provide a solution, it brings increased product sales and a higher average order value with the customer, benefiting from the cost and time efficiencies. The graphic on the right-hand side of the slide illustrates the range of procurement solutions we offer from the more transactional to the fully integrated, depending on our customer requirements. Additionally, our technology-driven model means that we are at the forefront of the changing world. So, for example, we have connected the industrial assets of a major UK logistics operator to to a cloud-based reporting and condition monitoring system. This generates data which helps them predict their maintenance needs and improve their productivity through using digitally enabled operational tools. Meanwhile, AESA and Synovos have a strong pipeline of new business wins and opportunities. AESA has won a number of contracts with a majority in Europe and is working with Synovos on joint pitches to some high-profile global corporates. Synovos is also working with our business in Asia Pacific on another joint pitch with a global corporate. We're in an industry-leading position in offering a truly global integrated supply solution. So slide 20. Slide 20 shows how we are unlocking opportunities to improve our customer experience. We are a leading omni-channel operator within our MRO competitive set, which allows us to provide superior customer service. But we don't want to be the top and just our competitive set. We want to provide the best experience against whoever we compete. On this slide, we show on the left-hand side of the table where we are now. We have over 14 million visits per month to our websites. and specialist knowledge, providing a wide service to all. On the right-hand side, we see the opportunity to drive our data harder, and we've hired digital and brand experts to get us there. Our journey is to improve our customer experience further, be it data or insight-led, adapt our service according to the customer, and focus more on the higher returning options through knowing our costs to serve better. We're already seeing benefits from the improved marketing efforts, meaning we have been able to reduce paid advertising spend, drive more organic traffic, and thus enhance returns. Overall, we are aligning our digital capabilities and service to maximize customer lifetime value. Slide 21. Slide 21 illustrates the breadth of our product offer versus our peers and the opportunity more importantly, to expand further. The breadth and depth of our product offerings continues to set us apart from our competition, and we have over 650,000 stock industrial and electronic products and over 3 million unstocked products. Our customers increasingly want a one-stop shop and security supply, and we have industry-leading availability and service. The investment into our distribution centers is widening our product offering. By March, we had 37,000 more product stocks in our allied distribution center in the United States. And our acquisitions are broadening the depth of expertise within each category even further. We're already seeing needlers winning contracts to supply PPE products for IESA's customers, as an example. Our offer is led by innovation and our electronics range, which alongside our design and technical expertise means we can help advise and supply our customers on their journey to remain relevant in this digital industrial revolution. So the last of our needle movers on slide 22 is developing our strong own brand offer RS Pro. And it is our main own brand, RS Pro. It continues to outperform the group, offering a quality value product for the customer and delivering revenue at a higher margin for us. RS Pro utilizes our extensive digital and customer data to design products and ranges our customers want, such as our very successful test and measurement kits as businesses return to work. The team is working closer with our digital marketing function to grow brand recognition, website traffic, and add-on sales through more targeted marketing campaigns and a more personalized customer journey. We see significant opportunity to develop our own brand further, especially in the Americas, where penetration is less than 1%, and we can offer RS Pro to Synovos' clients, as we do with AESA's. Further growth will be driven by new product launches and targeted marketing campaigns, and we're already working on the opportunities to develop our newly acquired PPE brands in the same way through our extensive distribution network. We're also developing a sustainable product range, providing quality products across various categories. So the second part on slide 23, delivering destination 2025, is detailed on this slide, and we've done much work on building the foundations, becoming a leaner organization since I joined six years ago. But the successful delivery of 2025 needs us to improve our operational basics even further, to be best in class in each discipline, including negotiating better buy-in prices, understanding our costs to serve, leveraging our existing capacity, utilizing our extensive database to be insight-led, sharing best practice and expertise on marketing, digital innovation, and products and supplier management, and even reengineering supply chains to be more sustainable and closer to the customer. Overall, we want to be globally connected but locally delivered, and we want to do it better. Slide 24 pulls together the work we're doing on improving sustainability through the supply chain. Our supply chain strategy is customer-centric, with multiple distribution centers regionally located. This allows us to provide a fast delivery service to our customers and be agile, which was crucial this year so that our service continued largely uninterrupted. We've invested heavily in our operations over recent years to reduce our environmental impact by progressively installing solar panels, implementing energy saving initiatives, and using renewable energy. But we're not stopping there. We want to transform our supply chain operations further. We're working with our supplier base today to reduce unnecessary transportation routes through restructuring our networks, both inbound and outbound. This will result in more deliveries direct from the manufacturing location via sea rather than air freight, growing the level of inventory we hold locally and increasing regional sourcing options. This will significantly lower carbon emissions from our supplier base and third-party delivery network and improve product availability delivery times, consistency, and customer service levels. This is a large project as we restructure decades of historic working, but one we are passionate about delivering. The last part of the big solve to accelerate growth is through inorganic opportunities on slide 25. Our prime strategic priority, of course, remains driving organic growth and the key areas outlined already. Where we already have the supplier relationships and in-house expertise, we're building out specialist ranges and services our customers require. However, we can see that we can accelerate this growth through inorganic expansion. We're focusing on three key areas, which in order of priority are product and service solutions, product extensions and adjacencies, and geographic developments. And we definitely have a strong pipeline of suitable opportunities and the financial strength to add further acquisitions which fit strategically and culturally and where we can generate meaningful value. So turning to slide 26, part of destination 2025 is making amazing happen for a better world. We're committed to accelerating the positive impact we have on society and and on the environment by inspiring a more sustainable world through education and innovative solutions that improve lives. This year, we have strengthened our ESG approach, which is focused on four key pillars, the environment, customers and suppliers, people and health and safety, and the community. Each pillar has a clear commitment and 2025 targets, which are outlined on slide 34. with a more in-depth ESG presentation available on our website under the Investor's Financial Results link. But doing the right thing in terms of working towards a more sustainable and inclusive future is not new to us. We've been integrating this as part of our business as usual for years, which brings us to 527. And this business as usual is across our entire group. as illustrated here, and ranges from providing a free online design community to over 1 million members in DesignSpark, restructuring our customer delivery routes to be more environmentally efficient through ice and snowless, and providing more energy-efficient solutions through RS Munition, to name just a few. All our work has been driven from within to deliver sustainable growth. I am fully responsible and committed to our ESG approach, and our president of our global supply chain leads the planning, execution, and governance of all we do. Our new VP of Social Responsibility and Sustainability is bringing together all work to develop further targets beyond Destination 2025. I am incredibly proud that our ESG work has gained recognition by external agencies, including MSCI ESG A rating, a CDP climate change leadership score of A-, being 10th out of 13,494 companies with Sustainalytics, and a gold medal rating by EcoVardis. We know our ESG is strong. working positively across our business. And we've just won a large contract with a major global customer in the Americas who mentioned our ESG commitment and technology innovation as being two differentiating factors. But we look to improve our ESG further going forward. So in summary on slide 29, we're excited about the opportunities we see. There will be pressures ahead, and we're, of course, mindful of the ongoing external headwinds, but we have left some 1% share in a 400-billion-pound global market where a differentiated model sets us apart from our competition. We're driving market share growth through ongoing development of our product and service solutions, customer experience, and our product offer, including our own RS Pro specialist brand. We have a well-invested operating model, which we are leveraging and simplifying to drive sustainability, scale, and a lower cost to serve. And we're cash generative with a strong return focus. Our ESG ambitions are part of our destination 2025 strategic plan, and I'm proud of the ESG journey so far, but see more to do going forwards. We're excited about the future and the opportunities we have to accelerate our growth through organic and inorganic expansion. Thank you for listening. Now I'll pass you back to the operator to open it up for a Q&A.

Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. We have the first question from the phone line today from Keane Martin of Jefferies. So, Keane, please go ahead.

Thanks. Morning, all. Thanks for the additional language on the two-year stats. So, it looked like in the first seven weeks you were running basically about 20% up on the equivalent level in 2019. I think as you pointed out you sort of started that year slowly but you also exited the year quite slowly as well so the comp sort of gets a bit more difficult but then it gets easier as the year progresses is there any reason why your business shouldn't continue to be 20 bigger broadly than 2019 over the remainder of this fiscal year is the first question Then you're obviously trying to flag some additional costs in the business so we can sort of break down sort of the COVID and the Brexit costs being something in the region of a 30 million headwind in the year just gone. I just wonder if you can help us understand how some of those linger in the current fiscal year and then you call out things like FX translation and supply chain potentially as additional costs that we might want to overlay onto that as well. And then I've got some more, but I'll stop there. Just keep it at two for the moment. Thanks.

Hi, good morning, Keane. David here. Let me address your first question with regards to our performance in the first seven weeks. I think sort of the first thing is it is only seven weeks of activity. As we said in the statement, we have started the year in a strong mode. If you look on a one-year comp basis, obviously we've outperformed significantly, but that's really off the back of subdued numbers as a consequence of COVID. If you look on a two-year basis, we had a very slow start to the year in FY20, and in particular within the Americas. So we are running at sort of double-digit CAGR on a two-year basis at this point in time. As we look forward for the full year, our visibility remains negligible or very minimal. Consensus is currently at around 9% growth for the full year. Our comps do get harder, so we did deliver 10% growth in the second half of FY21. So the comps will get harder throughout the balance of the year. At this point in time, given we're only seven weeks in, We're comfortable with where consensus is, but we'll provide a much broader and more robust update when we go through Q1 at the beginning of July. With regards to the costs, we called out £19 million of cost in the statement for FY21. £17 million was COVID, £2 million was Brexit. As we look forward, the £2 million of Brexit will moderate but probably later in FY22. Those additional costs are largely broker-related, and we can't moderate them completely until we get the Bernhurst or German distribution centre up and running fully. So that's really during the back end of FY22 that they will moderate. On the $17 million of COVID costs, $12 million of that is freight-related. We haven't seen any moderation of freight yet, We had hoped to migrate from air to sea, which we did, but equally we saw freight rates of sea increase. So the $12 million is not something that we're expecting to go away anytime soon. And the balance of the $5 million, which is largely inefficiencies off the back of COVID, we are still running inefficiently because of social distancing within our distribution centres, but we would expect that to moderate as COVID as lockdowns ease throughout the world.

Thank you very much.

Thank you. We now have the next question from Rory McKenzie of UBS. So Rory, please go ahead when you're ready. Your line is open.

Thanks, morning all. It's Rory here. Firstly, I wanted to ask about your customer numbers and customer trends. How do the customer numbers finish the year? and maybe exclude kind of B2C and just focus on the kind of core B2B customers, you know, has that accelerated through the pandemic? I know that customers typically start with a very small wallet share, but again, just trying to ask how much your business footprint has structurally expanded. And then secondly, maybe following up from the Keynes question, where should we be worried about revenues falling back in any areas? do you expect some of that B2C revenue growth to disappear as behavior normalizes? How much revenue from PPE might disappear over the next year? Maybe the first two first, and I've got one on margins, please.

Yeah. Hi, Roy. This is Leslie. On customer trends, our customer count for overall was up 18% year over year. For B2B, it was up 8%. So, We have seen a strong growth in terms of, obviously, customers via the website. You know, I said we're up to, you know, 14 million is what our average was last year, but we actually hit over 15 million customer visits in one month in the last couple of months. So we're doing a good job at acquiring new customers as we broaden our product portfolio and as we add the acquisitions. As far as the revenue growth, I'll turn that to David to kind of respond to that, but I just say PPE is still a very small percentage of our total number, and overall B2C is not as profitable as our B2B business.

Yeah, Rory. PPE has had negligible benefit to us in FY21, and we would see that You know, the main sort of growth in PPEs is really off the back of the acquisitions that we've acquired and we've given you guidance in terms of their revenue contributions. On B2C, minimal contribution, we would sort of minimal sort of one-off contribution in FY21 and would expect that to continue going forward. In terms of the watch-outs for us on the revenue, I think sort of the two that I would just sort of call out are, but with a degree of caution. One is just the whole supply chain, the end-to-end supply chain. We're not seeing any material challenges at this point in time, but there are some shortages of product, and there are certainly customers or segments, end segments, that are seeing slowing of their manufacturing activities. So again, we haven't seen any material impact on our business versus, say, other companies that have called out. And then the second one is just inflation and price, inflationary cost increases slash price increases. Again, we haven't seen any material changes in that regard, but it's one that we're monitoring very, very closely to date. The cost increases from a product perspective, we've been able to pass on. And then wage inflation, we are seeing wage inflation running through our business, really off the back of a positive benefit of giving our people a pay increase versus wage stability during the course of the last year. So overall, they're the two watchouts, but they're not having any material effect on our business at this point.

Okay, great. Thank you. And then just on the margins, on slide 17, there are more and more initiatives under number two there to drive operating leverage, which is interesting, especially on the whole shifting supply chains because of the customers. Can you talk about what you've learned from the expansion in the U.S. VC? And can you remind us what the timeline is for Germany now and what that would mean for your European business overall?

Yes. So, on that front, Roy, let me first start with Germany. We see Germany and the expansion in Germany as an opportunity to serve the pan-European market. It's going to allow us to deal with that cost and a lot of the Brexit costs much more effectively and efficiently and stop having trucks stopped in different areas, as an example. And so, you know, most freight companies are still trying to work through the challenges of Brexit. I think we were well prepared, but a lot of our suppliers were not well prepared for Brexit. So Germany will be – it's on track to open with our new distribution center and expansion in September. It's obviously fully operational now, but we're on track for a September launch of that facility. In the U.S., what we've learned is we can assign a lot more suppliers. So we've added 50 new suppliers in the U.S., and we're broadening our range significantly. And I was there, obviously. I'm in the U.S. now. I'll be back in two weeks. But it's really exciting. David came over a few weeks ago. And to see what we're doing with that team, as he mentioned, is truly remarkable. So huge upside in the U.S. with our operations and overall facility.

Okay. That's great. Thank you.

Thank you for the question, Rory. The next question comes from David Brockton of Numis. So, David, please go ahead.

Good morning. I've got two questions, please. The first one relates to market share gains. In the appendices, you've kindly set out how you think you're performing across all regions. The one region where you seem to have not outperformed, I guess, is Japan, yet you reference that market being buoyant now. So the first question is, do you think you are now taking share or are you just matching the market? And what do you think you need to do to change there, if not? And then the second question just goes back to the customer numbers that was asked earlier. That seems to be growing faster than revenue growth. And I guess clearly B2C has driven a part of that, but B2B was also up. So it implies average order frequency was down a Just again, interested in your insights into that. Is that COVID related or is there anything you can do there to improve average order frequency? Thanks.

Yeah, those are great questions, David. Let me take the Japan question first in terms of market share gains. So first of all, that wasn't part of your question, but we're taking market share from the small and regional distributors, especially those that did not have the capability to work virtually from home. So we've seen a significant increase in market share from those types of companies. In Japan, 92% of our sales in Japan historically have been in electronics. So we're not a strong player in the Japanese market. So we've seen it more opportunistically. So that's why we've called that out as a decline because we're shifting our focus more from electronics to MRO in the Japanese market as we move forward. But our focus in Asia is more on Southeast Asia, China and Australia, New Zealand as priorities. I think in terms of B2B, you know, I think on the B2B side, the average order of frequency, what we've seen is because of the reduction in the number of buyers and maintenance engineers during COVID, We've seen an increase in customers, but a decrease in average order frequency as they haven't been able to buy all the products that they typically would buy. So, you know, the restocking hasn't been as high as it has. If you've got eight buyers versus 15 because they're furloughed, you know, you're going to buy only what's unplanned or what's necessary. So we've seen average order frequency go down slightly because of that. But average order values continue to do well. So, you know, that's the flip side of the coin.

I think just one build, David. The Japanese market for us is around 2% of our virtual group revenue. So it's a small market for us. As Lindsay said, we're not as well positioned electronics. We're moving a little more into the industrial side of activities and, you know, holding our own, I guess, where we are at the moment.

Thanks, it was very clear.

Thank you. The next question from the phone lines we have is from James Barrow of Barclays. So, James, please go ahead when you're ready.

Morning. I just had two on the supply chain. Firstly, from an ESG perspective, you've obviously been doing a lot on your own actions around energy efficiency and so on, but as you expand the product offering, Could you comment on what practices you have in place around auditing your suppliers to ensure they are aligned with your own objectives? Do you have a sort of global supplier code of conduct? Is it done on a local level? So just some commentary there. And then secondly, on the inventory initiatives around holding more inventory locally to improve customer proposition. Could you just comment on what impact you expect that to have on inventory turn in the medium term?

Yeah, so let me take the first part of that. From an ESG perspective, we do audit all the suppliers that we look at finding. So we have a very well-organized global process for core product offering that we plan to stock. So we're looking at that. We're developing standards for that as we speak, as it relates specifically to ESG. But it is something that's really important and is important for the supply chain. And from an MSCI perspective, I spoke to their CEO recently, so we're looking at a lot of data and information to become more efficient in how we do that from an ESG perspective. In regards to inventory, I'll let David comment on inventory, but I just say that what we're looking to do is be able to stop, you know, for example, having product go from China to the U.K. back to China or China to the U.K. to Germany. So from an inventory standpoint, you know, we're not talking about a significant impact of terms. It's more about where we source and stock product and how we make sure there's no price inflation because we're buying less in terms of quantity in the U.K.

Hi Jane, David. Our terms for FY21 were at 2.7 times. We are looking to put a bit more inventory, absolute value inventory into the system. We've seen as we've put inventory into our distribution centre in the Americas that that's had a positive effect in terms of velocity and driving the top line. We'll obviously be doing the same over time in Germany but equally just to support and to protect our supply chain, we'll be putting a bit of additional inventory into the system. I wouldn't call it sort of completely out of this world, and we're not going to destroy our inventory turns, but it might soften a little bit. But overall, we'll be investing a little bit more, as we've done with Brexit, with regards to inventory levels.

Thank you. And congratulations on the win over the weekend.

Long overdue, yeah.

Perfect. We have the final question on the phone lines from Henry Carbner of Peel Hunt. So please go ahead, Henry.

Morning, guys. Just a follow-up from me on market share comments. I mean, clearly you're taking share against the smaller players, which you sort of expect in a tough environment. I just wondered if you've got any comments around how you might be doing against some of the other larger players And if you're outperforming them as well, any color would be much appreciated. Thanks.

Yeah. You know, I'm always hesitant and reluctant to comment against the larger players because we want to stay off their radar. But we definitely are winning share against the larger players as we expand our range. But I'll just leave it at that. You know, it's – the smaller regional players were running share, but the larger players were running share too. And there's, yeah, I think it's pretty clear, you know, some have struggled during COVID because they had, they didn't have the ability to work from home and they didn't have the ability to do the projects and to collaborate as effectively as we have. So, But, you know, the larger players that are out there, we know who they are, and we have a breakdown where we're winning products in each of those categories.

Great stuff. Thanks, Izzy.

And again, just one small build, Henry. I think we are definitely taking, you know, great share with regards to the industrial competitor landscape. We are growing certainly in electronics, but we're not as well positioned in electronics So again, we don't necessarily reap the rewards on the upside, but equally, we don't necessarily reap the challenges on the downside. So again, we're holding our own on electronics, but certainly outperforming in industrial.

Brilliant.

Thank you.

We now have a follow-up question from Keane Madden of Jefferies. So Keane, please go ahead.

Hi, so the follow-ups. Could you maybe share when you're going to roll out the needless PPE product range into RS Pro and then on the States? Lindsay, did you mention that you've increased stocks' SKU numbers by 37,000? And if so, over what time period were you referring to? And then just finally on inflation, not typically something you've had to worry about with electric components because some of your products are deflationary. And so therefore, you know, price has never really been much of a discussion point for a while. But obviously, you've got low stock term. Your sort of inventory accounting policy, I think we use time-weighted as well. Is there potential for inflationary gains to come through if prices do pick up and you're set on that low stock term. Thanks.

Yeah, so I'll comment and then David can comment. I think on needlers, what we're doing is we're integrating needlers into the European operation and we'll be able to take those products on a global basis. So when it comes to private label, we have to slowly look at how we change those names contractually with customers of the products that needlers have because they do have their own private label brand. And as you remember, five years ago, we converted all four of our private label brands into one and came up with the RS Pro. So, RS Pro didn't exist before five years ago. So, we'll certainly look at what we can do more in terms of renaming those products RS Pro over time. The 37,000 parts we added were over the course of the year. So... You know, we expect to add a lot more in the next couple of years as part of Destination 2025. As David mentioned, we've got 3 million unstocked products to offer. We'd love for that to be around 10 million. We have 650,000 stock core products today. That does not include non-core that might just come through the warehouse and go out. Those are stock products. I would expect that to more than double over the next couple of years. given our investment capacity, as we've talked about before. The last question in regards to inflation, you know, you've got to remember, and David can comment on this too, our average order value is quite low. So when we get price increases, it's easier for us to pass them along than some of the volume distributors. So with an average order value of less than 200 pounds, it's not the same as an average order value of 20,000 pounds. It's some of the large electronics volume distributors get where it's more challenging. So it's more about availability and supply chain disruption and making sure we mitigate that. And that's the huge advantage of having the turns we have today is we've got a ton of inventory on the shelf, which helps us during this. You know, there's supply chain disruptions all over the place now, but it helps us during this period.

Yeah, and Kian, I think with regards to inventory valuations, there's always swings and roundabouts in terms of cost increases or cost reductions or price increases, price reductions on the inventory values. We don't expect there to be any sort of material positive or negative variance as a consequence of inflation flowing through. We're looking to pass on cost increases and we'll certainly move our margin forward with internal objectives as best we can. But we certainly, we're not using the situation to do anything untoward. So I think it's in the ordinary course in terms of provisions. One final comment on needless. What we have seen with needless is that we've brought some of the needless products into the RS offer and equally Aether is now sourcing Needlers products through their customers. So again, we are driving those synergies off the back of the acquisition of Needlers and Liskam here in the UK for the PPE products.

Okay. Thank you very much, both. Cheers.

Cheers.

As a reminder, ladies and gentlemen, to ask any further questions, that is star followed by one on your telephone keypads now. We have a follow-up question again from James Barrow of Barclays. So, James, please go ahead. Your line is now open.

It was just two follow-ups, if I may. The first one was, David, I think you already commented on wage inflation, but speaking to some other companies operating in the US specifically, they said that labour availability generally is a bit of an issue with some people in certain roles happy to sit at home for a couple of months now they've received their COVID checks and that's impacting their ability to meet service levels. Are you seeing anything in that area? And then the second one was just on e-procurement with large customers. You said web sales have continued to be strong, but can you remind us how much of digital revenue comes from pure web sales versus e-procurement and whether those e-procurement sales with large customers have started to come back strongly at the start of this financial year?

Yeah, so, Jane, just on the EPROC, two-thirds of our cells are web cells. One-third is EPROC. And we have definitely seen those cells start to return. But where we've really been – and that's important. And EPROC is something we're developing out in the Americas, a capability that we never really had as significantly as Europe. But when it comes to the website, you know, I'm really proud of what our teams have done, and we've really transformed search engine optimization, as David commented, so that we can spend less on paid search and get a higher return on our website sales, and obviously the margin is slightly higher. So in terms of inflation, I'll let David take that question, but I'll just tell you this. because I'm in Texas now, although it's really early in the morning. We haven't seen a lot of employees over what you commented on, and we didn't have the furlough situation like the U.K. and the U.S., so we run a pretty lean organization in the United States in terms of the operational team. And with the D.C. expansion, obviously we're having to add resources as as we grow our inventory and as we expand our operations. So it's not really COVID-related. It's more about the availability of labor in the Dallas-Fort Worth market.

Yeah, and the overall wage inflation running through the business in the year FY22 is probably going to be somewhere between 2% to 3% on a four-year basis. Again, we had wage freezes, not reductions, but wage freezes last year and this year we're going forward with the normal pay increase process.

Thank you.

Thank you. We have no further questions registered so we'll hand it back over to the management team.

Okay. Well, thank you very much everyone for joining today. As always, we're available for any questions you might have, so let us know, and thank you for joining and spending time with us.