Full-year results for the year ended 31 March 2017

ELECTROCOMPONENTS PLC

AUDITED RESULTS FOR THE YEAR ENDED 31 MARCH 2017

 

A YEAR OF SIGNIFICANT FINANCIAL AND OPERATIONAL PROGRESS

 

Highlights		2017	2016	Change
				Reported	Underlying1
Revenue		£1,511.7m	£1,291.1m	17.1%	4.8%
Headline2 operating profit		£133.2m	£82.0m	62.4%	33.7%
Headline2 operating profit margin		8.8%	6.4%	2.4 pts	1.8 pts
Headline2 profit before tax3		£128.0m	£76.8m	66.7%	35.7%
Headline2 earnings per share		21.0p	12.6p	66.7%	35.5%
Headline2 free cash flow		£117.7m	£62.6m	88.0%
Net debt		£112.9m	£165.1m	31.6%
Leverage (x EBITDA)		0.7x	1.5x
Full-year dividend		12.3p	11.75p	4.7%
Reported profit before tax		£127.1m	£34.9m	264.2%
Reported earnings per share		20.9p	5.0p	318.0%

 

Re-presentation of gross margin4	2017	2016	Change
			Reported	Underlying1
Gross margin4	43.4%	42.7%	0.7 pts	0.8 pts
Gross margin (under previous classification)4	43.9%	43.5%	0.4 pts	0.6 pts

 

(1)       Underlying growth, unless otherwise stated, is adjusted for currency movements, in addition underlying revenue growth measures are also adjusted for trading days. Positive currency movements increased Group reported FY revenues by around £140 million, additional trading days boosted Group revenues by around £10 million.

(2)      Headline measures exclude net reorganisation costs of £0.9 million in 2017 and £41.9 million in 2016. For all alternative performance measures, refer to Note 12.

(3)       Positive currency movements increased headline profit before tax by around £18 million.

(4)       Gross margin has been re-presented, the write-down of inventory to net realisable value had previously been included under distribution and marketing expenses, and has now been included as a cost of sales. There is no change in the underlying business and no impact on operating profit. (see further details under gross margin).                                                                                                                                                                                                                                                                                                

Financial Highlights

Accelerating revenue growth

·      Underlying revenue growth of 4.8%, with reported revenues up 17.1% aided by currency and extra trading days.

·      H2 underlying revenue growth accelerated to 7.5% vs 2.1% in H1 with all hubs seeing faster H2 growth.

Improving profitability while investing to drive future growth of business

·      Gross margins rose 0.7% points, driven by actions on price, lower inventory write-downs and currency benefits.

·      Operating margins were up 2.4% points to 8.8% driven by strong sales, higher gross margins and cost control.

·      Headline PBT of £128.0 million was up 66.7% and 35.7% on an underlying basis. Reported PBT was £127.1 million.

·      Reported PBT of £127.1 million was up 264.2% aided by a year-on-year reduction in net reorganisation costs.

EPS and cash flow growth drive first increase in dividend for five years

·      Headline EPS was 21.0p, up 66.7% or 35.5% on an underlying basis. Reported EPS was 20.9p, up 318.0%.

·      Strong headline free cash flow growth of 88.0% drove a 31.6% reduction in net debt to £112.9 million.

·      Recommending full-year dividend of 12.3p, up 4.7% reflecting confidence in the future prospects of the Group.

 

Operational highlights

·      Strengthened leadership team with new Presidents hired for RS, Allied and Product & Supplier Management.

·      Market share gains in Northern Europe and North America driven by an improved go-to-market approach.

·      A major step forward in Asia Pacific with a return to revenue growth in H2 and full-year loss halved.

·      £18 million of savings delivered in 2017: on track for £30 million cumulative annualised target by March 2018.

·      Improvements in customer experience with Net Promoter Score (NPS) up 6.3% to 43.6.

CURRENT TRADING AND PROSPECTS                                                                                                                           

We have made an encouraging start to 2018, with continued strong underlying revenue momentum in the first seven weeks of the year. All our hubs are delivering revenue growth, with North America continuing to experience strong double-digit underlying revenue growth. We are using current growth momentum to accelerate investment in talent and innovation to drive faster growth in the business in the medium term.

We remain on track to deliver a further £5 million of cost savings during the current financial year, leading to total cumulative annualised net savings of £30 million by March 2018. Work continues to identify further efficiencies and simplify the way we operate. All these actions mean that we are well positioned to make good progress in the year to March 2018.

 

LINDSLEY RUTH, CHIEF EXECUTIVE OFFICER, COMMENTED: 

"Over the last two years, we have significantly strengthened our leadership and begun to refocus the business back on what lies at its heart, the customer and the supplier.  'Getting the basics right' is now delivering strong top line growth, stable gross margins, improved efficiency, and significant growth in profits and cash flow. With a stronger balance sheet, we are pleased to return to growing our dividend. We have taken a major step forward.

 

"From this stronger platform we are focussed on the next step change in the performance of this organisation. Having reconfirmed our strategic priorities and identified concrete transformation initiatives to drive future performance, we remain excited about the significant potential for further improvement and growth."

 

Enquiries:

Lindsley Ruth, Chief Executive Officer	Electrocomponents plc	01865 204000
David Egan, Group Finance Director	Electrocomponents plc	01865 204000
Polly Elvin, VP of Investor Relations	Electrocomponents plc	07973 812481
Martin Robinson/David Allchurch	Tulchan Communications	020 7353 4200

 

The results statement and presentation to analysts are published on the corporate website at www.electrocomponents.com.

 

Notes on financial terms

In order to reflect underlying business performance, the Group uses a number of alternative performance measures, including headline and underlying performance measures. Comparisons of underlying revenue between periods (including by region, product group and channel) have been adjusted for currency and trading days (underlying revenue growth). For all alternative performance measures, refer to Note 12.

Changes in profit, cash flow, debt and share-related measures such as earnings per share are, unless otherwise stated, at reported exchange rates.

 

Sign conventions: % changes in revenue and costs are disclosed as positive if improving profit and negative if reducing profit.

 

Notes to editors:

Electrocomponents has operations in 32 countries. We offer more than 500,000 products through the internet, catalogues and at trade counters to over one million customers, shipping around 50,000 parcels a day. Our products sourced from 2,500 leading suppliers, include electronic components, electrical, automation and control and test and measurement equipment, and engineering tools and consumables.

 

The business satisfies the small quantity needs of its customers who are typically electronics design engineers, machine and panel builders, maintenance engineers or buyers. A large number of high-quality goods are stocked, which are dispatched the same day that the order is received. The average customer order value is around £150 although the range of order values is wide. The Group's customers come from a wide range of industry sectors with diverse product demands.

 

 

VISION AND STRATEGY

Our vision is to become the global provider of end-to-end solutions offering products from mechanical to electronics, powered by technology, innovation and data-led insight.

Performance Improvement Plan

The Performance Improvement Plan (PIP), launched in 2015, was focussed on 'getting the basics right' through a number of initiatives targeted at improving customer experience, increasing accountability throughout the organisation, and simplifying the business to enable the Group to operate for less. The PIP has delivered improved levels of customer satisfaction, total cumulative net annualised savings of £25 million in 2016 and 2017, and a significant uplift in performance both in terms of profit and free cash flow.

Review of Strategy

The Board continually reviews the Group's strategy including our target market, competitive position and our ability to execute, to ensure that the business is well positioned for continued success over the long term. Electrocomponents has leading market positions in a very large and highly fragmented global marketplace valued at approximately £380 billion, with many potential opportunities for future growth. An integral part of the Board's review is to ensure we work to identify areas of investment to maximise this opportunity and deliver future value for our customers, suppliers and shareholders alike. It has also confirmed the Group's five key strategic priorities, and identified a number of concrete transformation initiatives that will drive future performance.

Five Strategic Priorities and Group transformation initiatives

·      Best customer & supplier experience: We are focussed on excelling at the basics and driving differentiation for our customers and suppliers via innovation and data-led insight.

Ø Extend non-stocked product range and fill gaps in stocked range as a source of competitive advantage

Ø Tailor our offering for specific sectors and customer types

Ø Increase focus on profitable growth with global accounts

Ø Leverage our data to deliver value-added solutions for key customers and suppliers so we can compete on value not price

 

·      High-performance team: We are investing in talented leaders to build a results-orientated, customer-focussed, diverse, global talent base.

Ø Leadership and incentive structures that drive the right behaviours in our people

Ø Continued investment in talent and training to develop a high-performance team

Ø Roll out of sales effectiveness programme across the regional hubs

 

·      Operational excellence: We are focussed on continuously improving service and efficiency.

Ø Increase investment in Continuous Improvement initiatives and training to improve the way we work

Ø Use shared business services and technology to free up resources for more value-added activities

Ø Digitise our supply chain and invest in a central 'control tower' to drive improved customer service and efficiency

 

·      Innovation: We will introduce new products and solutions for our customers harnessing our digital expertise, data and insight, and take advantage of changing market dynamics and new opportunities for growth and efficiency.

Ø Harness digital/IT to drive a brilliant customer and supplier experience and drive operational efficiency

Ø Utilise our data to drive decision making in marketing, pricing and product management

Ø Transform our customer eProcurement and inventory management tools to be best in class

Ø Invest in innovative data-driven solutions for our customers and suppliers

 

·      Disciplined investment to accelerate growth: We will be disciplined in our allocation of strong cash flows between investment in the business to drive faster market share gains and providing attractive returns to shareholders.

Ø Organic reinvestment in our business with capital expenditure at or above depreciation

Ø Acquisitions in line with the strategy to drive faster future growth

Ø A growing dividend while rebuilding cover

 

 

OVERALL RESULTS

	2017	2016	Change
			Reported	Underlying1
Revenue	£1,511.7m	£1,291.1m	17.1%	4.8%
Gross margin2	43.4%	42.7%	0.7pts	0.8 pts
Headline3 operating profit	£133.2m	£82.0m	62.4%	33.7%
Headline3 operating profit margin	8.8%	6.4%	2.4 pts	1.8 pts
Headline3 operating profit conversion %	20.3%	14.9%	5.4 pts	4.0 pts
Reported operating profit	£132.3m	£40.1m	229.9%	145.0%
Reported operating margin	8.8%	3.1%	5.7 pts	5.0 pts

 

(1)       Underlying adjusted for currency; revenue also adjusted for trading days

(2)       Gross margin re-presented for a change in the classification of the expense with respect to the write-down of inventory to net realisable value from distribution and marketing expenses to cost of sales (see paragraph below on gross margin)

(3)       Headline measures exclude net reorganisation costs of £0.9 million in 2017 and £41.9 million in 2016. For definitions of all alternative performance measures, refer to Note 12.

 

Revenue

Group revenue increased by 4.8% on an underlying basis and 17.1% on a reported basis to £1,511.7 million (2016: £1,291.1 million). During 2017, it was pleasing to see positive revenue trends in all our five regional hubs, with each region seeing underlying revenue growth rates improve during H2, delivering Group H2 revenue growth of 7.5% (H1 2017: 2.1%).

eCommerce, which represents 60.2% of revenue, grew in line with the Group on an underlying basis with 4.9% revenue growth in the full year and an acceleration in H2 to 7.5% (H1 2017: 2.1%). RS Pro, which accounts for 12.4% of revenue, outperformed Group revenue growth with 6.4% underlying revenue growth in the full year, but saw growth slow to 5.6% in H2 (H1 2017: 6.6%), given tougher trading comparatives.

2017 reported revenue and profit had a significant benefit from currency movements and additional trading days. Revenue has benefitted by around £141 million from currency movements and around £10 million from additional trading days. In 2018 we expect to see some of this benefit reverse, as we will have fewer trading days, which we anticipate will have a negative impact on revenue of around £20 million.

Gross margin

The Group has elected to revise its presentation of gross margin. Historically, inventory write-downs to net realisable value have been included in operating expenses under distribution and marketing expenses. We believe it is now better to present inventory write-downs within cost of sales and we intend to report gross margin on this basis going forward. As a result, the Group has re-presented its costs relating to the write-down of inventory to net realisable value resulting in a movement of £10.4 million from distribution and marketing expenses to cost of sales for the year ended 31 March 2016. This change has no impact on Group profit before tax or operating margin, but has led to a 0.8 percentage point reduction in the previously reported gross margin for 2016 and a 0.3 percentage point increase in our previously reported headline operating profit conversion ratio to 14.9%. For the year ended 31 March 2017, the change has led to a 0.5 percentage point reduction in gross margin to 43.4% and a 0.2 percentage point increase in our headline operating profit conversion ratio to 20.3%. There is no impact on other areas of the income statement or the assets or liabilities of the Group.

During the year, the Group's gross margin rose 0.8 percentage points on an underlying basis, 0.7 percentage points on a reported basis to 43.4% (2016: 42.7%). Approximately two thirds of the underlying increase in gross margin came from improved pricing, increased discounting discipline and foreign exchange. The recent devaluation of sterling has meant that foreign exchange moved from a negative for gross margins in H1 to a positive feature in H2 and for the full year as a whole. The balance of the year-on-year underlying improvement was primarily driven by a reduction in the level of inventory write-downs of £3.7 million. 

Operating costs

We continue to focus on increasing efficiency and simplification so we can reallocate resource into higher growth areas and convert a higher proportion of gross profit into operating profit. During the year, the strong momentum in the business together with the delivery of £18 million of net annualised efficiency savings (H1: £13 million and H2: £5 million) enabled us to invest in future growth through talent, innovation, digital and RS Pro.

Total headline operating costs, which include hub costs and central costs, increased by 2.6% on an underlying basis and 11.6% on a reported basis to £523.5 million (2016: £469.1 million).  We saw an increase in variable costs and employee incentive costs driven by faster revenue growth and improved business results.

As revenue growth significantly outpaced cost growth, our headline operating profit conversion ratio improved by 4.0 percentage points on an underlying basis and by 5.4 percentage points on a reported basis to 20.3% in 2017 (2016: 14.9%). Reported operating costs as a percentage of revenue fell by 1.7 percentage points to 34.6% (2016: 36.3%).

Net reorganisation costs

The total net reorganisation costs for the Group fell to £0.9 million during the year (2016: £41.9 million), which comprised a £2.1 million labour-related restructuring charge, which was partially offset by a profit on disposal of our Singapore warehouse of £1.2 million. The £41.9 million charge in 2016 comprised labour restructuring charges, costs of exiting our Singapore warehouse and non-cash asset write-downs.

Operating profit

Headline operating profit (stated before net reorganisation costs of £0.9 million) for the year increased by 33.7% on an underlying basis or 62.4% on a reported basis to £133.2 million (2016: £82.0 million). The headline operating profit margin rose 1.8 percentage points on an underlying basis, 2.4 percentage points on a reported basis to 8.8% (2016: 6.4%). Reported operating profit for the year increased by 229.9% to £132.3 million (2016: £40.1 million) with growth aided by lower reorganisation costs. Reported operating margin rose by 5.7 percentage points to 8.8% (2016: 3.1%).

 

SEGMENTAL RESULTS

The following section looks at the performance of each of our five hubs: Northern Europe, Central Europe, Southern Europe, North America and Asia Pacific (including our emerging markets operations) as well as the central costs. In order to give a fairer reflection of the underlying performance of our business, we have reallocated a higher portion of annual incentive charges out of central costs and into hub costs. This change in the presentation of annual incentive charges results in a movement of £0.9 million from central costs into hub costs in 2016, although there is no impact on Group operating profit. We have re-presented our 2016 segmental results to reflect these changes, see Basis of Preparation and Group Accounting Policies for full details.

Northern Europe

	2017	2016	Change
			Reported	Underlying1
Revenue	£413.1m	£384.2m	7.5%	4.6%
Operating profit2	£79.5m	£67.9m	17.1%	16.4%
Operating profit margin2	19.2%	17.7%	1.5 pts	1.7 pts

1)        Underlying adjusted for currency; revenue also adjusted for trading days

2)        2016 figures re-presented for reallocation of annual incentive charge (see Basis of Preparation for more details)

 

The Northern European hub consists of the UK, Ireland and Scandinavia and is our most profitable region. The UK is the main market for this hub, accounting for around 90% of its revenue. Our UK business is the market leader, supported by 16 trade counters located in the country's key industrial towns and cities.

Northern European revenue increased by 4.6% on an underlying basis, an increase of 7.5% on a reported basis, to £413.1 million (2016: £384.2 million). The hub saw good growth across the year, with underlying revenue growth of 3.5% in H1 increasing to 5.6% in H2, with all three markets within the hub contributing to this strong performance. The UK continued its turnaround with robust growth throughout the year helped in part by a favourable competitive environment. The UK exited 2017 with its 16th consecutive month of growth in March.

The hub remains focussed on increasing market share gains by delivering incremental improvements to our customer and supplier experience, driving brand awareness via initiatives such as "RS Live" (our mobile innovation experience), refining its go-to-market approach and improving sales effectiveness. The UK has run a successful sales effectiveness pilot, which has helped underpin this robust revenue performance and which will be rolled out across the rest of the Group during 2018. eCommerce revenue, which accounts for 67.8% of hub revenue, grew at 4.1% on an underlying basis. RS Pro revenue, which accounts for 21.7% of revenue, grew at 4.8% on an underlying basis.

The devaluation of sterling led to pressure on inventory prices for Northern Europe, during H2. This negative impact from currency led to a decline in gross margin in H2, in spite of management activities to drive price initiatives, improve mix and increase discounting discipline. Robust sales growth and continued efficiency gains more than offset lower gross margins and investment in areas to drive growth such as Pay Per Click (PPC) marketing, digital and RS Pro. As a result operating profit increased by 16.4% on an underlying basis, an increase of 17.1% on a reported basis, to £79.5 million (2016: £67.9 million). Operating margins rose 1.7 percentage points on an underlying basis, 1.5 percentage points on a reported basis, to 19.2% (2016:17.7%).

 

Southern Europe

	2017	2016	Change
			Reported	Underlying1
Revenue	£301.9m	£250.4m	20.6%	4.2%
Operating profit	£36.1m	£23.0m	57.0%	19.5%
Operating profit margin	12.0%	9.2%	2.8 pts	1.5 pts

 

1)    Underlying adjusted for currency; revenue also adjusted for trading days

 

The Southern European hub consists of France, Italy, Spain and Portugal. France is the main market for the region and accounts for approximately two-thirds of the hub's revenue.

Southern European revenue increased by 4.2% on an underlying basis, an increase of 20.6% on a reported basis, to £301.9 million (2016 £250.4 million), with all countries in the hub seeing good growth. Growth was strong across the year, with underlying revenue growth of 3.8% in H1 increasing to 4.5% in H2. The Southern European hub has been focussed on driving an excellent customer and supplier experience via improvements in our online offering, increased technical support and account management for key customers.

France grew broadly in line with the overall hub, with growth driven by RS Pro and the small and medium-sized customer segment. French corporate accounts saw slower growth given strong comparatives in the year. Italy saw growth accelerate in H2 after a slow start to the year, with H2 benefitting from easier trading comparatives and strong corporate account growth. Iberia saw good growth across the year with an acceleration in H2 driven by both corporate and smaller accounts and a strong RS Pro performance. eCommerce revenue, which accounts for 71.9% of hub revenue, was up 3.9% on an underlying basis. RS Pro, which accounts for 15.3% of revenue, was up 9.4% on an underlying basis.

Operating profit was up 19.5% on an underlying basis, a 57.0% increase on a reported basis, to £36.1 million (2016: £23.0 million). Operating margin was up 1.5 percentage points on an underlying basis, an increase of 2.8 percentage points on a reported basis, to 12.0% (2016: 9.2%). The hub saw an increase in gross margin primarily driven by foreign exchange movements, actions on pricing and increased discipline on discounting. This, and the benefits of lower direct hub costs, more than offset investment in areas such as RS Pro, and increased marketing to promote key strategic suppliers including an acceleration in PPC, and Search Engine Optimisation (SEO) activity.

 

Central Europe

	2017	2016	Change
			Reported	Underlying1
Revenue	£206.6m	£173.4m	19.1%	2.2%
Operating profit2	£14.3m	£6.2m	130.6%	33.6%
Operating profit margin2	6.9%	3.6%	3.3pts	1.5 pts

 

1)    Underlying adjusted for currency; revenue also adjusted for trading days

2)    2016 figures re-presented for reallocation of annual incentive awards (see Basis of Preparation for more details)

 

The Central European hub consists of Germany, Austria, Benelux, Switzerland and Eastern Europe. Germany is the main market for the region and accounts for approximately two-thirds of the hub's revenue.

Central European revenue increased by 2.2% on an underlying basis, an increase of 19.1% on a reported basis, to £206.6 million (2016: £173.4 million). Following a disappointing H1, we made changes to the hub leadership team and developed a new commercial plan for the region. The new interim management team has made a good start at turning around the revenue performance in this important region and we were encouraged to see underlying revenue growth improve to 4.6% in H2 (H1 2017: (0.2)%). However, we still believe we have further work to do in Central Europe and we are not yet fully capitalising on the market opportunity in this region. We have recently appointed a new leader for the Central European hub; this appointment together with new country manager appointments in Germany and Austria mean we are confident we have the right leadership team in place to drive the hub forward.

eCommerce, which accounts for 71.2% of revenue in the hub, saw growth of 1.7% on an underlying basis. RS Pro, which accounts for 12.3% of revenue, grew 5.1% on an underlying basis. Looking at performance by market, Germany returned to growth in H2 driven by a pick up in sales in small and medium-sized accounts and a continued strong performance in corporate accounts sales. Performance in Benelux and Austria remains challenging overall, with both suffering from strong Raspberry Pi comparables. The smaller markets of Switzerland and Eastern Europe grew faster than the overall hub growth rate with a strong corporate accounts performance driving growth.

Operating profit was up 33.6% on an underlying basis, an increase of 130.6% on a reported basis, to £14.3 million (2016: £6.2 million). The hub saw an increase in gross margin primarily driven by foreign exchange movements and actions on pricing and increased discipline on discounting. This and the benefits of lower direct hub costs more than offset investment in areas such as innovation, RS Pro and PPC marketing, leading to the improvement in overall hub margin. Operating margin improved by 1.5 percentage points on an underlying basis, 3.3 percentage points on a reported basis, to 6.9% (2016: 3.6%).

 

North America

	2017	2016	Change
			Reported	Underlying1
Revenue	£393.0m	£319.9m	22.9%	7.3%
Operating profit2	£46.2m	£36.2m	27.6%	10.3%
Operating profit margin2	11.8%	11.3%	0.5pts	0.4pts

 

1)    Underlying adjusted for currency; revenue also adjusted for trading days

2)    2016 figures re-presented for reallocation on annual incentive awards (see Basis of Preparation for more details.)

 

The North American hub consists of our Allied business and includes operations in the USA, Canada and Mexico.

Overall, North American revenue increased by 7.3% on an underlying basis, an increase of 22.9% on a reported basis, to £393.0 million (2016: £319.9 million). Allied saw revenue momentum improve as the year progressed with H2 underlying revenue growth accelerating to 13.6% versus 1.4% in H1 driven by improved market conditions, further market share gains and easier trading comparatives.

The interim management team at Allied has focussed on driving growth and market share by investing in digital marketing, additional sales heads and expanding into new markets such as Mexico. The team has continued to improve customer experience both online and offline, with the addition of Field Application Engineers to offer onsite technical support. As a result, we have taken market share in North America, particularly in the Automation and Control market which remains Allied's key strength. eCommerce, which represents 42.0% of hub revenue, saw revenue increase 9.1% on an underlying basis benefitting from investment in digital marketing. RS Pro continued to see very strong growth from a low base during the year, with North America remaining a significant opportunity for the future growth of RS Pro.

Operating profit was up 10.3% on an underlying basis, 27.6% on a reported basis, to £46.2 million (2016: £36.2 million). While competitive initiatives led to a reduction in gross margin in the full year, this was more than offset by cost reduction initiatives. As a result, our overall operating margin improved 0.4 percentage points on an underlying basis, 0.5 percentage points on a reported basis to 11.8% (2016: 11.3%).

A new President of Allied, Steve Newland was appointed in February 2017. He has extensive industry experience and we believe he will bring a new level of energy and ambition to the Allied team.

 

Asia Pacific

	2017	2016	Change
			Reported	Underlying1
Revenue	£197.1m	£163.2m	20.8%	4.2%
Operating loss2	£(10.4)m	£(22.2)m	53.2%	51.6%
Operating profit margin2	(5.3)%	(13.6)%	8.3pts	6.2pts

 

1)    Underlying adjusted for currency; revenue also adjusted for trading days

2)    2016 figures re-presented for reallocation of annual incentive awards (see Basis of Preparation for more details)

The Asia Pacific hub includes both our Asia Pacific and our emerging markets operations. Asia Pacific consists of four similarly sized sub-regions: Australia/New Zealand, Greater China, Japan and South East Asia. We have emerging markets operations in South Africa and Chile and use third-party distributors elsewhere.

Asia Pacific hub revenue increased by 4.2% on an underlying basis, 20.8% on a reported basis, to £197.1 million (2016: £163.2 million). Underlying revenue growth accelerated in H2 to 7.9% versus 0.5% in H1, with the improvement being driven by a recovery in growth in China and South East Asia. This recovery is a result of improvements in our customer service and go-to-market approach. Over the year, we have delivered a significant improvement in service reliability with a range reliability project across the region delivering some excellent results including an improvement in 'On Time to Promise' (OTTP) service metric in China from 76.0% to 84.9%. We remain focussed on driving further improvements in customer service in Asia Pacific to bring OTTP closer to the Group average level of 94%. We are also beginning to invest in customer acquisition in Asia Pacific, which is leading to growth in customer numbers in both China and South East Asia.

Both Emerging Markets and Australia/New Zealand saw good double-digit revenue growth trends across the year with the latter benefitting in particular from a recovery in demand from the resources sector. Japan continues to remain a difficult marketplace for us; customer experience in Japan is still not where it ought to be and this is impacting negatively upon revenue performance. We are taking steps to address these issues and in particular investing to improve our online experience in this predominantly web-based market.

eCommerce, which accounts for 50.8% of revenue in the hub, saw growth of 7.0% on an underlying basis. RS Pro, which accounts for 12.8% of revenue, grew 5.6% on an underlying basis.

Operating loss reduced by 51.6% on an underlying basis, a 53.2% reduction on a reported basis, to £10.4 million (2016: £22.2 million). This improvement was driven by significant restructuring activity within the region to lower the cost base as well as a good performance on gross margin. Gross margin improved during the year due to both management activities on price and mix and a currency tailwind from sterling weakness, which led to some purchasing benefits in the region.

 

Central Costs

	2017	2016	Change
			Reported	Underlying1
Headline central costs(2,3)	£(32.5)m	£(29.1)m	(11.7)%	(8.3)%

 

1)      Underlying adjusted for currency

2)      Headline costs are defined as before net reorganisation costs, asset write-downs or disposals

3)      2016 figures re-presented for reallocation of annual incentive awards (see Basis of Preparation for more details).

Headline central costs are Group head office costs and include PLC, finance, human resources and legal costs. Headline central costs increased by 8.3% on an underlying basis, 11.7% on a reported basis to £32.5 million (2016: £29.1 million). The increase was primarily driven by an increase in performance related pay, reflecting improved operating results and higher share-based payment charges, which more than offset a gain on centrally managed foreign exchange cash flow hedges.

 

FINANCIAL REVIEW

 

Net finance costs

Net finance costs were £5.2 million, in line with 2016 (£5.2 million).

Profit before tax

Headline profit before tax was up 35.7% on an underlying basis or 66.7% on a reported basis to £128.0 million (2016: £76.8 million). Reported profit before tax was up 264% to £127.1 million (2016: £34.9 million), with the year-on-year growth aided by the significant reduction in net reorganisation costs to £0.9 million in 2017 (2016: £41.9 million).

Taxation

The Group's headline tax charge was £35.4 million (2016: £21.4 million), resulting in an effective tax rate of 28% on headline profit before tax, unchanged from the prior year. The reported tax charge was £35.0 million (2016: £13.0 million). This includes a tax credit of £0.4 million relating to the tax effect of the restructuring charge, and a charge of £1.1 million relating to the Group's assessment of uncertain tax provisions (2016: £1.8 million credit). The effective tax rate on reported profit before tax was 28%.

The Group's effective tax rate is sensitive to the geographic mix of profits, and reflects the impact of higher rates in certain jurisdictions such as the US. Looking forward to 2018 we do not envisage any significant change to our headline effective tax rate.

During the year, the Group's tax strategy was reviewed and endorsed by the Board. We continue to seek to ensure that key tax risks are appropriately mitigated, that appropriate taxes are paid in each jurisdiction where the Group operates, and that  our reputation as a responsible taxpayer is safeguarded.

We are committed to having a positive relationship with tax authorities and to dealing with our tax affairs in a straightforward and honest manner.

Earnings per share

Headline earnings per share was up 35.5% on an underlying basis and up 66.7% on a reported basis to 21.0p (2016: 12.6p). The weighted average number of shares was 440.3 million (2016: 439.4 million). Reported earnings per share was up 318% to 20.9p (2016: 5.0p).

Return on Capital Employed (ROCE)

ROCE, which has been calculated using year-end net assets, excluding net debt balances and net retirement benefit obligations, was 22.0% (2016: 14.5%).

Cash flow

Cash generation during the year has been strong. Headline cash generated from operations increased to £169.0 million (2016: £116.9 million) with the increase being driven by the improvement in headline operating profit and continued tight working capital management. Working capital as a percentage of sales improved by 1.4 percentage points to 20.9% (2016: 22.3%). Stock turn improved to 2.8× (2016: 2.7×).

Net interest paid of £4.9 million (2016: £5.2 million) was in respect of borrowings, whilst income tax paid amounted to £27.5 million (2016: £20.2 million). The tax cash flow in 2017 benefitted from a deduction for restructuring costs incurred during the prior year. We expect the cash tax and the effective tax rate to converge in 2018 as this benefit is not repeated, and prior year tax losses continue to be utilised.

Net capital expenditure in 2017 was £15.1 million (2016: £28.9 million) and included a £3.8 million inflow from the proceeds of the sale of the Singapore warehouse. During the year we took action to review a number of capital expenditure projects as we drove a higher level of financial discipline and project prioritisation into the capital expenditure planning process. As a result, capital expenditure fell to around 0.7× depreciation during the year (2016: 1.0×). The main capital expenditure project in 2017 was the completion of the global stock planning tool. We anticipate capital expenditure to run at around 1× depreciation during 2018.

Headline free cash flow for the year was £117.7 million (2016: £62.6 million). Headline operating cash flow conversion, which is defined as headline free cash flow pre-taxation and interest as a percentage of headline operating profit and is one of our seven KPIs, improved to 112.7% (2016: 107.3%).

There was a net cash outflow relating to restructuring activities of £5.1 million during the year, which largely relates to labour restructuring charges partially offset by the proceeds from the sale of the Singapore warehouse of £6.3 million.

Net debt

Net debt at 31 March 2017 was £112.9 million (2016: £165.1 million), a 31.6% decrease year on year, driven by strong headline free cash flow from operations of £117.7 million, which more than covered the dividend payment of £51.7 million. Net debt comprised gross borrowings of £208.6 million offset by cash in hand of £76.7 million and other financial instruments of £19.0 million.

During the year the Group's c.£187 million syndicated multi-currency bank facility maturing in August 2019 was extended with six banks to August 2021. This facility, together with $185 million of US Private Placement (PP) notes, provides the majority of the Group's committed debt facilities and loans of £334.7 million, of which £181.4 million are undrawn as of 31 March 2017. The PP notes are split: $100 million maturing in June 2020 and $85 million maturing in June 2017. Cross currency interest rate swaps, which are maturing in June 2017, have swapped $40 million of the PP notes from fixed dollar to floating euro and $45 million from fixed dollar to floating sterling, giving the Group an appropriate spread of financing maturities and currencies.

Following additional guidance issued during the year by the IFRS Interpretations Committee (IFRS IC), we have revised our accounting policy relating to the offsetting of our cash pools. Balances will only be presented on a net basis when the Group has a legally enforceable right to set-off the recognised amounts, and intends to settle on a net basis or realise the asset and settle the liability simultaneously. As a result of this revised accounting policy we have restated our balance sheets to gross up both cash and short-term deposits and bank overdrafts by £317.0 million as at 31 March 2016 and by £277.9 million as at 31 March 2015.

The Group's financial metrics remain strong with EBITA interest cover of 29.4× and Net Debt to EBITDA of 0.7×, leaving significant headroom to the Group's banking covenants. Under the new extended bank facility, the net debt to EBITDA ratio has been amended so that net debt is now computed using average rather than closing exchange rates.

Pension

The Group has material defined benefit schemes both in the UK and Europe, with the UK scheme being by far the largest. All these schemes are closed to new entrants and in Germany and Ireland the pension schemes are closed to accrual for future service.

The combined gross deficit of the Group's defined benefit and retirement indemnity schemes at 31 March 2017 was £104.6 million; this compares to £133.5 million at 30 September 2016 and £43.3 million at 31 March 2016. Under IAS 19, the deficit of the UK defined benefit scheme at 31 March 2017 was £90.9 million, which compares to £116.6 million at 30 September 2016 and £30.4 million at 31 March 2016.

The increase in the UK deficit in 2017 was principally driven by an increase in liabilities due to discount rates falling by 1.0% point from 3.6% to 2.6%.

The triennial valuation of the UK Scheme at 31 March 2016 showed a deficit of £60.8 million on a statutory technical provisions basis. A recovery plan is in place, which has been agreed with the Trustees of the UK Scheme and our deficit contributions will continue with the aim that the Scheme is fully funded on a technical provisions basis by 2023. We expect 2018 cash contributions to be broadly in line with 2017, however we expect to see an increase in the charge to the income statement of around £3 million due to an increase in the net retirement benefit obligation.

Dividend

The Board proposes to increase the final dividend to 7.3p per share. This will be paid on 26 July 2017 to shareholders on the register on 16 June 2017. As a result, the total proposed dividend for the 2017 financial year will be 12.3p per share, representing an increase of 4.7% over the 2016 full year dividend, resulting in headline earnings dividend cover of 1.7×. The increase in the dividend reflects the Board's confidence in the future prospects of the Group and the Group's strengthened balance sheet. The Board intends to pursue a progressive dividend policy whilst remaining committed to further improving dividend cover over time by driving improved results and stronger cash flow.

 

Foreign exchange risk

The Group does not hedge translation exposure on the income statements of overseas subsidiaries. Based on the 2017 mix of foreign currency denominated revenue and adjusted profit, a one cent movement in euro would impact profit by around £1.0 million and a one cent movement in US dollars would impact profit by around £0.3 million.

The Group is also exposed to foreign currency transactional risk because most operating companies have some level of payables in currencies other than their functional currency. Some operating companies also have receivables in currencies other than their functional currency. We maintain three to six months' hedging against freely tradable currencies to smooth the impact of fluctuations in currency. The Group's largest exposures relate to euros and US dollars.

 

Group Income Statement

For the year ended 31 March 2017

 

	Note	2017	2016
		£m	£m
Revenue	1	1,511.7	1,291.1
Cost of sales		(855.0)	(740.0)
Gross profit		656.7	551.1
Distribution and marketing expenses		(491.0)	(440.0)
Central costs		(33.4)	(71.0)
Operating profit		132.3	40.1
Financial income		4.3	2.3
Financial expense		(9.5)	(7.5)
Profit before tax	1	127.1	34.9
Income tax expense	3	(35.0)	(13.0)
Profit for the period attributable to the equity shareholders of the parent company		92.1	21.9
Earnings per share - Basic	4	20.9p	5.0p
Earnings per share - Diluted	4	20.8p	5.0p
Dividends
Amounts recognised in the period:
Final dividend for the year ended 31 March 2016	5	6.75p	6.75p
Interim dividend for the year ended 31 March 2017	5	5.00p	5.00p

 

A final dividend of 7.3p per share has been proposed since the year end.

	Note	2017	2016
		£m	£m
Headline operating profit
Operating profit		132.3	40.1
Intangible fixed asset write down	2	-	11.2
Net reorganisation costs	2	0.9	30.7
		133.2	82.0

 

Headline profit before tax
Profit before tax		127.1	34.9
Intangible fixed asset write down	2	-	11.2
Net reorganisation costs	2	0.9	30.7
		128.0	76.8

 

 

Headline earnings per share
Basic	4	21.0p	12.6p
Diluted	4	20.9p	12.6p