ECM.L Regulatory News (ECM)

24 May 2018, 7.00 am

ELECTROCOMPONENTS PLC

RESULTS FOR THE YEAR ENDED 31 MARCH 2018

STRONG RESULTS AND NEW INITIATIVES TO DRIVE FUTURE GROWTH AND PROFITABILITY

(1) Like-for-like change excludes the effects of changes in exchange rates on translation of overseas operating results, with 2017 converted at 2018 average exchange rates. Revenue is also adjusted to eliminate the impact of trading days year on year. Positive currency movements increased revenue by around £22 million, fewer trading days reduced revenues by around £21 million.

(2) Adjusted excludes substantial reorganisation costs, asset write-downs, one-off pension credits or costs, significant tax rate changes and associated income tax (refer to Note 10 for reconciliations).

(3) Positive currency movements increased adjusted profit before tax by around £5 million.

(4) 12-month rolling Net Promoter Score (NPS) is a measure of customer satisfaction and one of our Group key performance indicators.

FINANCIAL AND OPERATING HIGHLIGHTS

Accelerated growth

· Revenue growth of 12.8%, with all five regions seeing double-digit like-for-like growth

· Digital like-for-like revenue growth of 13.4% and RS Pro like-for-like revenue growth of 11.3%

· Further step towards best-in-class customer experience - RS Net Promoter Score4 45.7 (2017: 42.1)

Improving profitability

· Gross margin rose to 44.0% (2017: 43.4%), driven by both mix and progress on price and discounting initiatives

· Asia Pacific moved into profit in H2, driven by strong revenue growth and tight cost control

· PBT up 32.7% and adjusted PBT up 30.0% on a like-for-like basis

· Adjusted operating profit margin of 10.4% driven by revenue growth, higher gross margin and cost control

Strong EPS, cash flow and dividend growth

· EPS of 33.9p up 62.2% benefited from a non-cash US deferred tax credit; adjusted EPS up 35.2%

· Strong cash generation led to a reduction in net debt to £65.0 million and net debt to adjusted EBITDA of 0.3x

· Recommending full-year dividend of 13.25p, up 7.7% reflecting confidence in future prospects

PERFORMANCE IMPROVEMENT PLAN (PIP) - PHASE II

During 2018 we completed the first phase of the PIP delivering cumulative annualised savings of £30 million and a significant step forward in Group profitability over the course of the plan. We are now launching a second phase of the PIP aimed at further building and enhancing the organisation model and capabilities to drive continued revenue growth and improved profitability. Our proposals, which will be subject to consultation with employees, are based on two core principles:

Simplicity 

· New simpler regional structure, leaner centre, driving a more customer-centric organisation

· Targeting total annualised savings of £12 million by 31 March 2021, with £4 million in year to 31 March 2019

Scalability 

· Global shared services and automation strategy to drive improved service at lower cost

ACQUISITION

In line with our strategy to build out our value-added service proposition, Electrocomponents is pleased to announce the acquisition of IESA for £88 million. IESA significantly enhances the Electrocomponents value-added service proposition giving it additional capabilities to service corporate customers in areas such as sourcing, transaction process and inventory and stores management. As part of Electrocomponents, IESA and its clients will benefit from the scale and international spread of the broader Group, which should enable IESA to grow revenue at a faster rate. The transaction is expected to be accretive to Group earnings per share and meet our cost of capital in its first full year of ownership.

CURRENT TRADING AND PROSPECTS:

We have made an encouraging start to 2019, with strong revenue growth in the first seven weeks of the year despite tough trading comparatives. All our regions continue to see good revenue growth and market share gains. We are accelerating initiatives to create a leaner and more efficient operating model, which means that we are well positioned to continue to make good progress in the year ahead.

LINDSLEY RUTH, CHIEF EXECUTIVE OFFICER, COMMENTED:

"2018 has been a year of strong progress and significant growth in revenue, profitability and earnings. Our Performance Improvement Plan has delivered a major step forward in our quest to become first choice for customers, suppliers and employees but the opportunity for further growth and improvement still remains significant. Today we are launching a new phase of the improvement programme to ensure we fully capitalise on this exciting opportunity."

Enquiries:

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

Notes to editors:

Electrocomponents, through its trading brands RS Components (RS) and Allied Electronics and Automation (Allied), is a global multi-channel distributor. We offer more than 500,000 industrial and electronic products, sourced from over 2,500 leading suppliers, and provide a wide range of value-added services to over one million customers. With operations in 32 countries, we trade through multiple channels and ship over 50,000 parcels a day.

We support customers across the product life cycle, whether via innovation and technical support at the design phase, improving time to market and productivity at the build phase, or reducing purchasing costs and optimising inventory in the maintenance phase. We offer our customers tailored product and service propositions that are essential for the successful operation of their businesses and help them save time and money.

PIP PHASE II

2018 results demonstrate the significant progress made as a result of the PIP that was launched in November 2015. Over the course of the plan, we improved our key customer satisfaction metric of three-month rolling RS Net Promoter Score (NPS) by c.20%, accelerated like-for-like revenue growth to 12.8% in the year ended 31 March 2018 (2015: 3.5%) and delivered over 25% compound growth in operating profit, delivering cumulative annualised cost savings of £30 million over the course of the programme.

However, our aspiration remains to become best in class and in our business that means achieving NPS customer satisfaction scores in the 60s, driving adjusted operating profit conversion ratios towards 30% and delivering mid-teen adjusted operating profit margin. Our best performing regions are already achieving these metrics, but as an overall Group we still have significant further room for improvement. Hence, today we are launching the second phase of the PIP.

The second phase of the PIP is a programme aimed at further building and enhancing the organisation model and capabilities to enable us to drive profitable growth and operational improvement across our five strategic priorities. In order to move faster and adapt in an evolving marketplace, we need to make changes to our model to ensure it is simpler, even more customer centric, scalable and more efficient, and we need to operate for less. Consultation will of course be required before the plans can be finalised, but the key objectives of PIP Phase II are twofold:

1. Simplicity

We need to continue to make our organisation simpler, more customer centric and capable of driving success in both the industrial and electronics marketplaces.

· A regional model with a lean centre: We are proposing to move to a regional model, based around three regions; EMEA, Asia Pacific and the Americas, with the regional presidents reporting directly to the CEO. This structure would have a much leaner corporate centre with activities, such as product and supplier management and marketing, primarily being run within the regions, mirroring the way Allied is set up today in the Americas. Our aim is to be an even more customer-centric organisation where decisions on activities such as range and marketing are made closer to the customer. The proposed structure will give greater autonomy, agility and accountability to the region, which will enable us to adapt faster to changes in our customer needs and the marketplace. Finally, it should lead to efficiencies, removing duplicated cost between the centre and the regions.

· Reporting structure: Under this proposed structure we would report results for the three regions: EMEA, Asia Pacific and Americas.

· Savings: As a result of a new simpler organisation structure we hope to generate significant efficiencies and savings. Our longer-term aim remains to drive a best-in-class adjusted operating profit conversion ratio of 30%. We are targeting cumulative annualised cost savings of £12 million by March 2021 with £4 million of cost savings in the current year to 31 March 2019. We expect to see reorganisation costs in relation to the second phase of the PIP in the region of £12 million, the large part of which are likely to be cash costs, depending on the final details following consultation. The majority of this charge would relate to labour-related restructuring costs.

2. Scalability

We are building a global scalable platform using shared services and increased automation and technology.

· Global shared services and automation strategy: We are rolling out a global shared services strategy aimed at driving an improved customer experience at lower cost to complement our existing shared services operations in the UK, China and the Americas. Initially our focus will be on increasing the use of shared services to handle standardised transactional activities driving improved accuracy and scalability. As part of this plan, we will increase the use of automation with robotic process automation and, in the future, machine learning tools to increase speed and accuracy of processing and efficiency. The first step of the programme will be to move our existing Asia Pacific customer services shared service centre into a new larger regional centre of expertise based in Foshan in China. This will have the capability to cater for additional activities in line with our strategic ambitions and will be completed in calendar 2019. This project will not only drive improved customer experience but also create the capabilities required to drive scale and profitable growth in Asia Pacific in the longer term.

· Customer-centric supply chain: We will optimise and invest in supply chain to support our growth plans. The first phase includes an extension of the Allied warehouse in the Americas to house an expanded range and a project to optimise transport across the globe.

Five strategic priorities

The second phase of the PIP will help us accelerate our programme of improvement across our five strategic priorities which remain:

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

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

· Operational excellence: We are focused on continuously improving service and efficiency using new technologies and shared services.

· 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.

· 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.

OVERALL RESULTS

(1) Like-for-like change excludes the effects of changes in exchange rates on translation of overseas operating results, with 2017 converted at 2018 average exchange rates. Revenue is also adjusted to eliminate the impact of trading days year on year.

(2) Adjusted excludes substantial reorganisation costs, asset write-downs, one-off pension credits or costs, significant tax rate changes and associated income tax (refer to Note 10 on pages 19 to 22 for reconciliations). 

Revenue

Group revenue increased by 12.8% to £1,705.3 million (2017: £1,511.7 million). Foreign exchange movements had a positive impact on revenue of around £22 million which offset the adverse impact of around £21 million from fewer trading days. As a result, like-for-like revenue growth was also 12.8%. We saw double-digit like-for-like growth across both industrial and electronics product categories as well as in all five geographic regions as we successfully executed our strategy in what has been a healthy underlying marketplace. RS Pro, our own-brand range, which accounts for around 12% of Group revenue, saw like-for-like revenue growth of 11.3% with growth accelerating in H2 to 12.7% versus H1 9.6%. Digital, which accounts for around 61% of Group revenue, saw like-for-like revenue growth of 13.4% (H1 14.0%, H2 12.8%).

Gross margin

Group gross margin increased by 0.6 percentage points, 0.5 percentage points on a like-for-like basis, to 44.0% (2017: 43.4%), a similar year-on-year increase to that seen in H1. This was a positive outcome given we saw gross margin comparatives toughen in H2 with the foreign exchange benefit in H2 2017 not repeated in 2018. Group gross margin has been driven by strong progress during the year on management initiatives to improve product mix and drive discount discipline. We saw an acceleration in growth at RS Pro in H2, which aided progress on product mix, and good momentum on initiatives to improve discount discipline, particularly at Allied in the Americas. Looking forward to 2019, we remain focused on driving initiatives to stabilise and, where possible, improve gross margin in order to drive higher operating profit margin.

Operating costs

We continue to focus on increasing efficiency and simplification so we can convert a higher proportion of gross profit into operating profit.

During the year, total adjusted operating costs, which include regional costs and central costs (and exclude substantial reorganisation costs), increased by 9.4%, 8.2% on a like-for-like basis, to £572.7 million (2017: £523.5 million). Approximately half the underlying increase was due to inflationary increases in wages and higher variable costs including employee incentive costs driven by faster revenue growth and improved business results. The balance of the underlying increase was driven by continued investment in areas such as digital to improve online customer experience and drive more traffic to our websites as well as additional resource to support the growth of RS Pro.

As revenue growth outpaced cost growth, our adjusted operating profit conversion ratio improved by 3.3 percentage points, 2.9 percentage points on a like-for-like basis, to 23.6% (2017: 20.3%). Adjusted operating costs as a percentage of revenue fell by 1.0 percentage points to 33.6% (2017: 34.6%).

Substantial reorganisation costs

The Group incurred substantial reorganisation costs of £4.5 million in the year (2017: £0.9 million). Approximatelytwo-thirds of this cost related to the closure of our Oxford-based headquarters and the consolidation of ourLondon-based digital office into one enlarged head office and digital hub in King's Cross, London. The balance related to other labour-related restructuring charges also associated with the first phase of the PIP.

Operating profit

Operating profit rose 30.5% to £172.6 million (2017:£132.3 million). Excluding substantial reorganisation costs, adjusted operating profit increased by 33.0%, 28.1% on a like-for-like basis, to £177.1 million (2017: £133.2 million). Adjusted operating profit margin rose by 1.6 percentage points, 1.4 percentage points on a like-for-like basis, to 10.4% (2017: 8.8%).

Segmental results

All five of our regions saw double-digit like-for-like revenue growth during 2018. Performance was aided by a healthy market backdrop with strong PMIs (Purchasing Managers' Indices) across the globe, however, our teams have executed well and driven market share gains by focusing on the following three areas:

· Improving customer and supplier experience: We are focused on becoming first choice for suppliers and customers. We believe that when we are first choice for our customers they spend over 25% more with us. As such, our teams are relentlessly focused on making improvements to our customer experience, both online via improved search, website speed, content and payment processes and offline via improved delivery On Time To Promise (OTTP) and better customer communications when things do go wrong. As a result of all this activity, our RS NPS, a measure of customer satisfaction, rose 8.6% to 45.7 (2017: 42.1), with all regions seeing positive year-on-year trends in NPS. We have also continued to improve supplier experience by significantly speeding up our new product introduction process, improving supplier segmentation and allocating more resource towards our key strategic suppliers.

· Customer acquisition: During 2018, we have been highly focused on driving customer count and, as a result, almost half of our revenue growth has come from growth in customer numbers. In order to drive this success we have increased investment in brand awareness and marketing. Our ambition is to build a brand leadership position in our space and we continue to find new and innovative ways to engage with our customer base. We have also significantly stepped up pay-per-click (PPC) marketing across the globe and we continue to invest in search engine optimisation (SEO), which has driven significant growth in traffic to our site, with over 40,000 more visits to our sites each day.

· Selling more to existing customers: Finally, all of our regions have been focused on selling more to our customers and during 2018 we have seen growth in both average order value and online basket size, reflecting the progress we are making in these areas. We are using our data to qualify and prioritise our sales resources and training our people in value-added selling. In the online world we are investing to drive more personalisation into the online experience to drive higher basket size. We have also been working to broaden our product range and make it more relevant to our customer base and during 2018 we have added over 40 new suppliers at RS and 23 new suppliers at Allied. We have continued to invest to develop and improve our technical support functions and improve our value-added solutions, which include eProcurement solutions, managed inventory solutions and calibration services. RS Pro remains a key focus for our regional teams and during 2018 we increased investment in RS Pro inventory to drive improved availability and tailored product ranges to reflect local market needs. Looking forward to 2019, we will be focused on accelerating new product introduction at RS Pro with over 10,000 new products planned. We are also focused on enhancing our electronics product range and adding new global supplier franchises.

Northern Europe

RS is our trading brand in Northern Europe. This region consists of the UK, Ireland and Scandinavia and is our most profitable region. The UK is the main market and accounts for around 90% of the revenue. In the UK we have 16 RS Local trade counters providing a range of innovations and solutions for customers.

(1) Like-for-like adjusted for currency; revenue also adjusted for trading days

· Northern European revenue increased by 10.0%, 11.3% on a like-for-like basis, to £454.3 million (2017: £413.1 million). Like-for-like growth was broadly consistent across the two halves of the year (H1: 11.1%, H2 11.4%), despite tougher trading comparatives in H2.

· All three markets within the region saw strong underlying revenue growth trends. Scandinavia saw the fastest growth in the region, with the UK also delivering a strong performance aided by a robust manufacturing export market and continued market share gains.

· Our team in Northern Europe has been highly focused at developing its value-added services into a comprehensive proposition including calibration services, product plus (extended range), eProcurement and inventory management solutions. As a result we have seen significant growth in these services during the year. During 2019, we plan to roll out these services into other regions around the globe.

· Digital revenue, which accounts for around 69% of revenue, increased by 13.9% on a like-for-like basis as we significantly stepped up digital marketing investment during the year.

· RS Pro, which accounts for around 22% of revenue in the region, grew at 11.0% on a like-for-like basis.

· Gross margin was broadly stable during the year with the negative impact of weaker sterling offset by two factors being, firstly, our own actions to drive improved mix and pricing and, secondly, higher vendor rebates due to increased inventory investment.

· Operating profit margin fell by 0.7 percentage points on both a like-for-like basis and on a reported basis to 18.5% (2017: 19.2%) with the benefits of operational gearing offset by a substantial step up in digital investment and a change in intercompany charging for picking and packing goods. At the beginning of 2018, we reduced the intercompany charges that our central distribution centres in the UK charge the other regions for picking and packing goods to more accurately reflect the cost of picking and packing. This change has had no impact on overall costs or profit for the Group but it changes the mix of profit between regions. This led to a circa £3 million increase in net supply chain costs for Northern Europe and a commensurate lower share of costs for our other European regions and Asia Pacific.

· Operating profit was up 5.8%, 5.4% on a like-for-like basis, to £84.1 million (2017: £79.5 million).

Southern Europe

RS is our trading brand in Southern Europe. The Southern European region consists of France, Italy, Spain and Portugal. France is the main market for this region and accounts for approximately two-thirds of the revenue.

(1) Like-for-like adjusted for currency; revenue also adjusted for trading days

· Southern European revenue increased by 14.2%, 10.5% on a like-for-like basis, to £344.8 million (2017: £301.9 million). Like-for-like revenue growth moderated slightly in H2 to 9.8% versus 11.2% in H1 due to tougher trading comparatives.

· Our Southern European team has made good progress on driving stronger supplier partnerships via more effective account management during the year. Strong execution in positive underlying markets drove robust double-digit growth in all markets in the region.

· Digital revenue, which accounts for around 71% of revenue in the region, increased by 9.4% on a like-for-like basis.

· RS Pro, which accounts for around 15% of revenue in the region, grew at 10.6% on a like-for-like basis.

· Gross margin increased, aided by the impact of foreign exchange, higher vendor rebates and our own actions on pricing, mix and continued discount discipline.

· Operating profit margin improved by 4.2 percentage points, 3.7 percentage points on a like-for-like basis, to 16.2% (2017: 12.0%). The improvement was driven by higher gross margin, operational gearing, the change in intercompany charging for picking and packing goods and tight cost control. These effects more than offset increased investment in digital and innovation during the period.

· Operating profit was up 54.8%, 41.2% on a like-for-like basis, to £55.9 million (2017: £36.1 million).

Central Europe

RS is our trading brand in Central Europe. The Central European region consists of Germany, Austria, Benelux, Switzerland and Eastern Europe. Germany is the main market for this region and accounts for approximately two-thirds of the revenue.

(1) Like-for-like adjusted for currency; revenue also adjusted for trading days

· Overall, our Central European region saw strong 15.6% revenue growth, 12.8% like-for-like growth, to £238.8 million (2017: £206.6 million). Growth was consistent across the two halves of the year at 12.8%.

· All markets in the region saw double-digit like-for-like growth trends with some standout performances from the smaller markets of Austria, Eastern Europe and Switzerland.

· Digital revenue, which accounts for around 71% of revenue in the region, grew at 12.7% on a like-for-like basis.

· RS Pro, which accounts for 12% of revenue in the region, grew at 12.8% on a like-for-like basis.

· Gross margin increased, aided by foreign exchange benefits, higher vendor rebates, actions taken to improve discount discipline and pricing initiatives, including a new quotation process on our corporate account business.

· Operating profit margin improved by 5.0 percentage points, 4.3 percentage points on a like-for-like basis, to 11.9% (2017: 6.9%). Central Europe saw the benefits of higher gross margin, operational gearing and the change in intercompany charging for picking and packing goods, which more than offset increased investment in areas such as digital and innovation.

· Operating profit was up 99.3%, 71.7% on a like-for-like basis, to £28.5 million (2017: £14.3 million).

Asia Pacific 

RS is our trading brand in the Asia Pacific region. The Asia Pacific region consists of four similarly sized sub-regions: Australia and New Zealand, Greater China, Japan and South East Asia. We also have emerging markets operations in South Africa and India while using distributors in other territories.

(1) Like-for-like adjusted for currency; revenue also adjusted for trading days

· Asia Pacific revenue increased 15.0%, 18.2% on a like-for-like basis, to £226.6 million (2017: £197.1 million). Like-for-like revenue growth accelerated in H2 to 19.0% versus 17.2% in H1. All four sub-regions saw double-digit like-for-like growth during the year as the team executed well in a healthy underlying marketplace. Our emerging markets operations also saw strong double-digit like-for-like revenue growth.

· We have made significant progress in Asia Pacific over the last two and half years since the launch of the PIP. In August 2017 we hired a new leader for the Asia Pacific region, who has continued to develop his team with new leadership appointments in Australia, South East Asia, China, marketing, product management and a new head of digital for the region. The team's work to drive improved customer experience has driven a further 20.9% improvement in Asia Pacific's rolling 12-month NPS in the year to 32.4 (2017: 26.8). This is a good step forward but there still remains work to be done to bring customer service in Asia Pacific up to the Group benchmark. Next steps include localising our online experience and increasing engagement with local suppliers to drive a China-for-China inventory strategy, which will enable us to deliver a more relevant range to our customers and improve OTTP delivery.

· Digital revenue, which accounts for around 52% of revenue in the region, grew at 19.2% on a like-for-like basis.

· RS Pro, which accounts for around 12% of revenue in the region, grew at 10.1% on a like-for-like basis.

· Regional gross margin declined due primarily to product mix in our emerging markets operations, where we saw faster growth in lower gross margin product areas such as single-board computers.

· Strong revenue growth and tight cost discipline has resulted in the Asia Pacific region delivering a profit for the first time during H2 and as a result we have seen a significant reduction in operating loss for the full year to £0.5 million (2017: £10.4 million). While this is a significant step forward and a great credit to the team in Asia Pacific, we remain committed to driving scale and improved profitability in the region.

Americas

Allied Electronics and Automation is our main trading brand in the Americas region where we have operations in the USA, together with smaller operations in Canada, Mexico and Chile.

(1) Like-for-like adjusted for currency; revenue also adjusted for trading days

· The Americas revenue increased 12.2%, 13.5% like-for-like, to £440.8 million (2017:£393.0 million). Like-for-like revenue growth moderated in H2 to 11.6% versus 15.6% in H1 given a much tougher trading comparative.

· Allied continued to drive market share gains in the automation and control market, which remains its key focus. Growth was also aided by the addition of field sales in Mexico during the year and there are plans for further expansion of our Mexican salesforce in 2019. The team at Allied remain focused on driving an exceptional customer and supplier experience. Rolling 12-month NPS saw a further 4.4% improvement to 68.1 (2017: 65.2). Allied also added 23 new suppliers and significantly extended its product range during 2018 adding 15,000 new stock keeping units (SKUs). Looking forward to 2019, we have plans for further expansion with the addition of 25,000 new SKUs. To cope with strong growth and range expansion, we are planning to expand the Fort Worth warehouse, see more details on page 10.

· Digital revenue, which accounts for 43% of revenue in the region, grew at 15.4% on a like-for-like basis.

· RS Pro continued to grow strongly from a very low base in the Americas with significant further potential.

· Gross margin rose, driven by initiatives to drive improved pricing and discount discipline.

· Operating profit margin rose 0.4 percentage points on both a like-for-like basis and a reported basis to 12.2% (2017: 11.8%), with strong revenue growth, improved gross margin and tight underlying cost control, offsetting increased investment in digital and marketing during the period.

· Operating profit rose 16.0%, 17.0% on a like-for-like basis, to £53.6 million (2017: £46.2 million).

Central Costs

Central costs are Group head office costs and include Board, Group finance, Group HR and Group legal costs.

(1) Like-for-like adjusted for currency

Central costs of £44.5 million (2017: £32.5 million) increased by 36.9%, 36.5% on a like-for-like basis.

The year-on-year increase in central costs was impacted by a 2017 foreign exchange gain on centrally managed cash flow hedges which did not recur in 2018. This accounted for just under half of the increase. The balance was due to higher performance related pay, an increased pension charge due to higher retirement benefit obligations at the start of the year and some additional dual running costs related to the relocation of our head office from Oxford to London.

FINANCIAL REVIEW

Net finance costs

Net finance costs reduced to £4.0 million (2017:£5.2 million) reflecting the strengthened balance sheet.

Profit before tax

Profit before tax was up 32.7% to £168.6 million (2017: £127.1 million). Excluding substantial reorganisation costs, adjusted profit before tax was up 35.2%, 30.0% on a like-for-like basis, to £173.1 million (2017: £128.0 million).

Taxation

The Group's tax charge was £19.0 million. The enactment of the new US Tax Cuts and Jobs Act in December 2017 resulted in a non-cash tax credit of £27.9 million due to the recalculation of deferred tax balances at the new lower rate. This non-cash credit, along with a tax credit of £0.9 million relating to the tax effect of the substantial reorganisation costs, reduced the Group's effective tax rate to 11%. Excluding these two items, the Group's adjusted tax charge was £47.8 million (2017: £35.4 million), resulting in an effective tax rate of 28% on adjusted profit before tax, unchanged from the prior year. This includes a charge of £4.2 million relating to the Group's assessment of uncertain tax provisions (2017: £1.1 million).

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 2019 we expect the impact of the US Tax Cuts and Jobs Act to reduce the Group's adjusted effective tax rate percentage to the mid-20s.

During the year, the Group's tax strategy was reviewed and endorsed by the Board. Further details can be found on the Group's website. 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

Earnings per share was up 62.2% to 33.9p (2017: 20.9p) as it benefited from the non-cash deferred tax credit as a result of the US tax legislation. Adjusted earnings per share of 28.4p (2017: 21.0p) was up 35.2%, 29.7% on a like-for-like basis, as a result of the growth in adjusted profit before tax.

Cash flow

Cash generated from operations increased to £168.9 million (2017: £160.1 million) with the increase being driven by strong growth in operating profit, partially offset by increased inventory investment. During the year faster revenue growth drove higher working capital absorption by the Group. We also took a decision during the first half to increase inventory levels to improve product availability and our OTTP ratio, which had trended downwards during H2 2017. Product availability and OTTP are both key drivers of NPS and customer satisfaction.

Working capital as a percentage of revenue improved by 0.7 percentage points to 20.2% (2017: 20.9%). Stock turn was 2.9 times (2017: 2.8 times).

Net interest paid was £4.2 million (2017: £4.9 million). Income tax paid rose to £37.8 million (2017: £27.5 million) as 2017's tax cash flow benefited from a deduction for substantial reorganisation costs incurred during the prior year.

Net capital expenditure was £24.2 million (2017: £15.1 million) and, as a result, capital expenditure was 1.0 times depreciation (2017: 0.7 times). Key capital expenditure projects in 2018 included the upgrade to an Endeca search platform, data security upgrades to our online platform and the initiation of a project to ensure track and trace capability for RS customers. Looking forward to 2019 we are planning to increase investment in our supply chain to drive improved service for customers in two key areas. Firstly, we are continuing to invest in track and trace capabilities at RS. Secondly, we are currently reviewing a two-year £40 million plan to expand our existing Allied warehouse in Fort Worth, Texas, to support future growth and product range expansion. This project is still under review but, if approved, could lead to capital expenditure to depreciation rising closer to 1.7 times over the next two years.

Free cash flow was £102.7 million (2017: £112.6 million). Adjusted free cash flow was £105.1 million (2017: £117.7 million) and excludes a net cash outflow related to substantial reorganisation activities of £2.4 million, which largely relates to labour restructuring charges and our head office relocation. Adjusted operating cash flow conversion, which is defined as adjusted free cash flow before income tax and net interest paid as a percentage of adjusted operating profit and is one of our eight KPIs, was 83.1% (2017: 112.7%).

Return on capital employed (ROCE)

Net assets were £482.5 million (2017: £389.0 million). ROCE, calculated using adjusted operating profit for the 12 months to 31 March 2018 and year-end net assets excluding net debt and retirement benefit obligations, was 28.6% (2017: 22.0%).

Net debt

At 31 March 2018 net debt was £65.0 million (2017: £112.9 million). This reduction of £47.9 million was driven by strong adjusted free cash flow of £105.1 million which more than offset the dividend payment £55.4 million. Net debt comprised gross borrowings of £188.4 million offset by cash and short-term deposits of £122.9 million and cross currency interest rate swaps with a fair value of £0.5 million.

In June 2017 the Group repaid $85 million of its US private placement loan notes and in August 2017 the maturity of the Group's c. £186 million syndicated multi-currency bank facility was extended with six banks from August 2021 to August 2022. This facility, together with the remaining $100 million private placement loan notes maturing in June 2020, provides the majority of the Group's committed debt facilities and loans of £253 million, of which £152.5 million was undrawn as at 31 March 2018. Cross currency interest rate swaps have switched $20 million of the private placement loan notes from fixed dollar to fixed sterling, giving the Group an appropriate spread of financing maturities and currencies.

The Group's financial metrics remain strong with net debt to adjusted EBITDA of 0.3x leaving significant headroom to the Group's banking covenants.

Post balance sheet event

Today Electrocomponents has entered into an agreement to acquire IESA, a leading provider of value-added outsourcing services to industrial customers for a consideration of £88 million on a cash-free and debt-free basis, subject to customary adjustments. The acquisition is expected to be completed by the end of May and will be financed out of a new £120 million term loan, which is on comparable terms to existing debt and is also available for general purposes.

Pension

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

The combined accounting deficit of the Group's defined benefit schemes at 31 March 2018 was £72.4 million; this compares to £100.9 million at 30 September 2017 and £104.6 million at 31 March 2017. The UK defined benefit scheme's deficit at 31 March 2018 was £58.1 million, which compares to £86.7 million at 30 September 2017 and £90.9 million at 31 March 2017.

The decrease in the UK deficit in 2018 was driven by three key factors: a decrease in liabilities due to discount rates rising by 0.1% from 2.6% to 2.7%; a 0.1% fall in inflation assumptions; and a 0.15% decrease in the pension increase rate assumptions due to a change in the model used by our actuary.

The triennial funding 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 trustee 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 2019 cash contributions to be broadly in line with 2018.

Dividend

The Board proposes to increase the final dividend to 8.0p per share. This will be paid on 25 July 2018 to shareholders on the register on 15 June 2018. As a result, the total proposed dividend for the 2018 financial year will be 13.25p per share, representing an increase of 7.7% over the 2017 full-year dividend, resulting in adjusted earnings dividend cover of 2.1 times. 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. In the normal course, the interim dividend will be equivalent to approximately 40% of the full-year dividend of the previous year.

Foreign exchange risk

The Group does not hedge translation exposure on the income statements of overseas subsidiaries. Based on the mix of non-sterling denominated revenue and adjusted operating profit, a one cent movement in the euro would impact annual profit by £1.3 million and a one cent movement in the US dollar would impact annual profit by £0.4 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. Group Treasury maintains three to six month 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 2018

GROUP STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 March 2018

GROUP BALANCE SHEET

As at 31 March 2018

GROUP CASH FLOW STATEMENT

For the year ended 31 March 2018

GROUP STATEMENT OF CHANGES IN EQUITY

For the year ended 31 March 2018

NOTES TO THE PRELIMINARY ACCOUNTS

1. Basis of preparation

The financial information contained in this release does not constitute the Company's statutory accounts for the years ended 31 March 2018 or 31 March 2017 but is derived from those accounts. The accounts are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The accounting policies applied are set out in the Annual Report and Accounts for the year ended 31 March 2017. None of the new standards or amendments to standards and interpretations which the Group has adopted during the year has had a material effect on the reported results or financial position of the Group. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the Company's Annual General Meeting. The auditors have reported on both of these sets of accounts. Their reports were unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain any statement under sections 498(2) or 498(3) of the Companies Act 2006. The accounts for the year ended 31 March 2018 were approved by the Board of Directors on 23 May 2018.

2. Segmental reporting

The Group's operating segments comprise five regions: Northern Europe, Southern Europe, Central Europe, Asia Pacific and the Americas.

The Group derives its revenue from two product categories:

3. Substantial reorganisation costs

The Performance Improvement Plan (PIP) was launched in November 2015 and sought to drive the Group's strategic priorities. This year the first phase concluded and gave rise to the following substantial reorganisation costs which are excluded from adjusted performance measures:

During the year, the Group consolidated its Oxford-based headquarters with its London-based digital office into one enlarged head office and digital hub in King's Cross, London. As a result, onerous lease costs on the Oxford premises as well as redundancy costs associated with the office closure were incurred. Also, the Group incurred some other labour-related restructuring costs.

During the year ended 31 March 2017, the Group undertook restructuring activities across Europe in order to centralise and consolidate standard processes, resulting in costs of £2.1 million. Also, the sale of the warehouse and associated land in Singapore was completed, which resulted in a profit on disposal of £1.2 million.

4. Income tax expense

The enactment of the US Tax Cuts and Jobs Act in December 2017 lowered the US corporate income tax rate from 35% to 21% from January 2018. US deferred tax balances have been remeasured at this new rate and this results in a deferred tax credit of £27.9 million which is excluded from adjusted profit for the year.

5. Earnings per share

6. Dividends

The proposed final dividend of 8.0p is subject to approval by shareholders at the Annual General Meeting on 19 July 2018 and the estimated amount to be paid of £35.3 million has not been included as a liability in these accounts. This will be paid on 25 July 2018 to shareholders on the register on 15 June 2018 with an ex-dividend date of 14 June 2018.

7. Inventories

During the year £7.9 million (2017: £6.7 million) was recognised as an expense relating to the write-down of inventories to net realisable value.

8. Net debt

9. Retirement benefit obligations

The Group operates defined benefit schemes in the United Kingdom and Europe.

10. Alternative Performance Measures (APMs)

The Group uses a number of APMs in addition to those measures reported in accordance with IFRS. Such APMs are not defined terms under IFRS. The Directors believe that the APMs are important when assessing the underlying financial and operating performance of the Group. The APMs improve the comparability of information between reporting periods by adjusting for factors such as fluctuations in foreign exchange rates, number of trading days and items, such as reorganisation costs, that are substantial in scope and impact and do not form part of recurring operational or management activities that the Directors would consider part of underlying performance.

The APMs are used internally for performance analysis and in employee incentive arrangements, as well as in discussions with the investment analyst community. As a result of a review of its and other companies' APMs, the Group has renamed some of its APMs in order to make them more consistent with other companies and reduce confusion. Headline has been renamed adjusted and underlying renamed like-for-like. The definition of these APMs has not changed and so is consistent with prior years.

Like-for-like revenue growth

Like-for-like revenue growth is growth in revenue adjusted to eliminate the impact of changes in exchange rates and trading days year on year. It is calculated by comparing the current year revenue with the prior year's revenue converted at the current year's average exchange rates and pro-rated for the same number of trading days as the current year. This measure enables management and investors to track more easily, and consistently, the underlying revenue performance of the Group.

Like-for-like profit growth rates

Like-for-like growth rates are adjusted to exclude the effects of changes in exchange rates on translation of overseas profits. The rates are calculated by comparing the current year with the prior year converted at the current year's average exchange rates.

The principal exchange rates applied in preparing the Group accounts and in calculating the above like-for-like measures are:

Adjusted measures

These are the equivalent IFRS measures adjusted to exclude substantial reorganisation costs, asset write-downs, one-off pension credits or costs, significant tax rate changes and, where relevant, associated tax effects.

1 Operating profit margin is operating profit expressed as a percentage of revenue.

2 Adjusted operating profit conversion is operating profit expressed as a percentage of gross profit.

Free cash flow, adjusted free cash flow and adjusted operating cash flow conversion

Free cash flow is the net increase in cash and cash equivalents before net cash used in financing activities. Adjusted free cash flow is free cash flow adjusted for the impact of substantial reorganisation cash flows. Adjusted operating cash flow conversion is adjusted free cash flow before income tax and net interest paid, expressed as a percentage of adjusted operating profit.

Net debt - See Note 8.

Earnings before interest, tax, depreciation and amortisation (EBITDA) and net debt to adjusted EBITDA

EBITDA is operating profit excluding depreciation and amortisation. Net debt to adjusted EBITDA is the ratio of net debt to EBITDA excluding substantial reorganisation costs.

Return on capital employed (ROCE)

ROCE is adjusted operating profit expressed as a percentage of net assets excluding net debt and retirement benefit obligations.

11. Post balance sheet events

The Group is in late stage negotiations to acquire the share capital of AGHOCO 1079 Limited and its subsidiaries (IESA), a leading provider of value-added outsourcing services to industrial customers for a cash consideration of £88 million on a cash-free and debt-free basis, subject to customary adjustments. The agreement has been signed today and the acquisition is expected to be completed by the end of May and will be financed out of a new £120 million term loan, which is on comparable terms to existing debt and is also available for general purposes.

Today the Group is announcing it is launching the second phase of its Performance Improvement Plan. Reorganisation costs are expected to be in the region of £12 million, likely to be mainly cash costs, depending on the final details following consultation. We are targeting annualised cost savings of £12 million by March 2021, with £4 million in the year to 31 March 2019. See above for further details.

SAFE HARBOUR

This financial report contains certain statements, statistics and projections that are or may be forward-looking. The accuracy and completeness of all such statements, including, without limitation, statements regarding the future financial position, strategy, projected costs, plans and objectives for the management of future operations of Electrocomponents plc and its subsidiaries is not warranted or guaranteed. These statements typically contain words such as "intends", "expects", "anticipates", "estimates" and words of similar import. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Although Electrocomponents plc believes that the expectations reflected in such statements are reasonable, no assurance can be given that such expectations will prove to be correct. There are a number of factors, which may be beyond the control of Electrocomponents plc, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. Other than as required by applicable law or the applicable rules of any exchange on which our securities may be listed, Electrocomponents plc has no intention or obligation to update forward-looking statements contained herein.