ECM.L Regulatory News (ECM)

2 June 2020, 7.00 am

ELECTROCOMPONENTS PLC

RESULTS FOR YEAR ENDED 31 MARCH 2020

RESILIENT BUSINESS WELL POSITIONED FOR FUTURE OPPORTUNITIES

LINDSLEY RUTH, CHIEF EXECUTIVE OFFICER, COMMENTED: "Electrocomponents delivered a strong performance in the year ended 31 March 2020 against an uncertain market backdrop and the impacts of the COVID-19 pandemic which started to impact trading volumes towards the end of the year. During the current crisis our focus has been to safeguard the health and wellbeing of our employees, support our communities and continue to provide a reliable service to customers and suppliers, including many operating in critical industries.

We face this new challenge with a robust balance sheet and a clear Destination 2025 strategy. Our digital leadership, global distribution network and highly committed team differentiate us. We are taking tactical action to protect profit and conserve cash, while also accelerating key strategic initiatives to drive scale and efficiency to ensure we come out of this crisis strongly and well positioned for long-term value creation."

Continued customer focus driving further market share gains

· Like-for-like revenue growth of 2.2%, driven by continued share gains with growth in all three regions

· Around one percentage point negative impact on full year like-for-like revenue growth from lockdowns in March

· Strong like-for-like revenue growth at RS PRO of 8.9%. Digital revenue growth broadly in line with the Group

Resilient 2020 profit performance alongside targeted investment to drive scale and efficiency

· Gross margin of 43.7%, down 0.8 pts due to product mix and the launch and growth of OKdo

· Adjusted operating profit margin down 0.4 pts due to gross margin reduction and increased strategic investment

· Profit before tax (PBT) up 2.3%, adjusted PBT broadly flat year-on-year on a like-for-like basis at £215.0 million

Rapid COVID-19 response to support the needs of all our stakeholders

· Prioritising the health and wellbeing of our people, implementing flexible working practices and safety measures

· Maintaining a reliable service and ensuring supply chain continuity for customers and suppliers

· Supporting our communities and frontline health workers by setting up 3D printing farms to manufacture PPE5

Strong balance sheet, liquidity and financial resilience

· Net debt to adjusted EBITDA of 0.7x (2019: 0.5x), £350 million of facilities, of which £189 million are undrawn

· Sufficient liquidity under a demanding range of stress test scenarios

· Not currently accessing UK government furlough support for employees. No plans to access Bank of England CCFF

· The Board recognises the importance of the dividend but has decided it is prudent to defer the final dividend decision until it has greater visibility. At the half year, it will review making an additional interim dividend for 2020

Well positioned for future opportunities and market share gains

· Strong progress on Destination 2025 strategy to drive sustained growth and higher returns longer term

· Building lean and scalable infrastructure - technology upgrades and distribution centre expansion programme

· Ongoing simplification in operating model to allow us to move faster and drive further significant savings

Current trading: resilient business responding to COVID-19 challenge  

The supply side of our business remains robust and tightly managed with all our distribution centres (DCs) open and operating effectively. However, demand levels have been negatively impacted as the COVID-19 lockdown measures became more extensive across our key markets throughout April and May.

· Group like-for-like revenue declined 14% during the first eight weeks of the new year ending 31 March 2021

o EMEA saw a decline of 18% with Northern Europe declining by 19%, Southern Europe declining by 21% and Central Europe declining by 13%.

o Americas saw a like-for-like revenue decline of 10%.

o Asia Pacific saw a like-for-like revenue decline of 2%.

· At a Group level the rate of revenue decline moderated slightly during May as lockdown restrictions began to ease in some of our key markets.

· We continue to focus on measures to stabilise and improve gross margin.

· The drop through impact of lost revenue to adjusted operating profit for our business is typically in themid-thirties, pre mitigating actions.

(1) Like-for-like change excludes the impact of acquisitions and the effects of changes in exchange rates on translation of overseas operating results, with 2019 converted at 2020 average exchange rates. Revenue is also adjusted to eliminate the impact of trading days year on year. Acquisitions are only included once they have been owned for a year, at which point they start to be included in both the current and comparative periods for the same number of months. Currency movements increased revenue by £10.9 million, extra trading days increased revenue by £9.3 million.

(2) Adjusted excludes amortisation of intangible assets arising on acquisition of businesses, substantial reorganisation costs, substantial asset write-downs, one-off pension credits or costs, significant tax rate changes and associated income tax (refer to Note 10 on pages 27 to 31 for reconciliations).

(3) Currency movements increased adjusted profit before tax by £0.4 million.

(4) As a result of the adoption of International Financial Reporting Standard (IFRS) 16, 2020 net debt includes lease liabilities of £56.3m and net debt to adjusted EBITDA increases by 0.2x (refer to Note 1 on pages 22 and 23 for more details).

(5) Personal protective equipment (PPE).

LEI: 549300KVXDURRKVW7R37

Enquiries:

There will be a virtual analyst presentation today at 10.30am. We will provide an audio webcast which can be accessed live, and later as a recording, on the Electrocomponents website at www.electrocomponents.com.

Notes to editors:

Electrocomponents plc is a global omni-channel partner for industrial customers and suppliers who are involved in designing, building or maintaining industrial equipment and facilities. We aim to offer our customers unrivalled choice of product technologies, solve problems with innovative solutions and deliver a world-class customer experience, making it easy to do business with us.

We stock more than 500,000 industrial and electronic products, sourced from over 2,500 leading suppliers. We solve problems and provide a wide range of value-added solutions to over one million customers. With operations in 32 countries, we trade through multiple channels and ship over 50,000 parcels a day.

Electrocomponents plc is listed on the London Stock Exchange and in the last financial year ended 31 March 2020 reported revenue of £1.95 billion. Electrocomponents plc has six operating brands; RS Components, Allied Electronics & Automation, RS PRO, OKdo, DesignSpark and IESA.

OUR COVID-19 RESPONSE

As we respond to the unprecedented COVID-19 crisis we are ensuring we support the needs of all our key stakeholder groups; our people, our customers and suppliers, our communities and our shareholders. We have taken the following actions to:

Ensure the health and safety of our people 

· In January we formed a crisis management team which was quick to implement business continuity plans.

· Our DCs across the globe continue to operate effectively with social distancing and safety measures in place.

· We have provided sanitising equipment and PPE for our employees.

· We have set up our facilities to allow people to return to work safely, when the time is right.

· In response to lower volume levels we have temporarily stood down some of our employees.

· We have introduced a dedicated 'Keep Connected' website for all employees which delivers important wellbeing and communication resources to help keep our people and their families in touch, including those employees temporarily out of the business.

· Given the relative resilience of our business, we have taken the decision not to take UK government furlough support for employees at the current time.

Maintain service to our customers and suppliers 

· Our digital business model has enabled us to continue to support customers during the crisis.

· We have continued to provide a reliable service and supply chain continuity for customers and suppliers.

· We have helped critical industries, who rely on our services, to keep running.

· We are committed to paying our suppliers to agreed terms.

· We continue to invest to drive a best-in-class offer and service for our customers and suppliers alike.

Support our communities

· We are also playing a key role in our local communities during the fight against COVID-19.

· Our teams are supporting initiatives and providing technical resource to help build supply chains for the manufacture of ventilators, continuous positive airway pressure equipment and other medical devices across the globe.

· We are playing our part, helping to distribute 3D printed PPE to frontline health workers, donating filament across Europe to help people produce PPE equipment and have also set up our own 3D printing farms in the UK and Americas to support this effort.

· OKdo has launched 'Kits for Kids' to support parents who are trying to educate kids at home.

· We have launched a global distributor support line to help the wider distribution industry continue to supply critical parts during the crisis.

Deliver value for our shareholders 

· We continue to execute our Destination 2025 strategy to drive differentiation into our offer and build a lean and scalable model capable of delivering sustainable growth and higher returns.

· We are taking appropriate actions to protect profit, conserve cash, improve liquidity and strengthen our balance sheet, while continuing to accelerate a number of key initiatives which will help drive market share gains and growth where we see opportunity.

· The Board believes it is prudent to defer the decision on the final dividend for the year ended 31 March 2020 until it has greater visibility and the impact of COVID-19 on activity levels and cash generation in our key markets have become clearer. The Board recognises the importance of its progressive dividend policy to its shareholders and will therefore review making an additional interim dividend payment related to the year ended 31 March 2020 at the Group's half-year results in November 2020.

WE ARE TAKING ACTION NOW TO ENSURE WE REMAIN WELL POSITIONED FOR LONG-TERM SUCCESS

1) Accelerating activity where we see opportunity

We have made good progress on our Destination 2025 strategy during 2020. We have further improved digital experience and expanded and improved our value-added solutions proposition. We have also upgraded our product and content technology, which will enable us to expand our range and improve our content. Our DC expansion projects continue to advance well with the DC in the Americas due to open in this summer and our German DC scheduled for completion during calendar 2021. As we move further into the current financial year, we are accelerating activity across a number of our key Destination 2025 work streams to ensure we continue to differentiate and emerge from this crisis strongly. These include:

· Digital leadership: The COVID-19 crisis is changing consumer behaviour as people across the globe become used to working, communicating and transacting online. We believe it will accelerate the pace of digital transition within our own industry and we are well positioned to benefit from this trend. During the first eight weeks of 2021, while demand levels have slowed, our website visits have seen close to double-digit growth, with new online customer numbers also increasing. We are accelerating initiatives to drive further differentiation in our digital proposition to convert and retain these new customers. We are also working to enhance our online experience and marketing in the Americas. During our first half of 2021, we will launch our rebuilt RS mobile-first responsive website - this will drive a step change in online experience and enable us to better realise the continued growth of mobile search. We are also accelerating the roll out of new technology across the globe to optimise and improve returns on paid customer acquisition and investing to step change our marketing, website personalisation and customer retention activities, with increased use of data and automation.

· Range expansion in growth segments: In the near term, we are expanding into segments which are seeing strong growth such as janitorial, 3D printing, PPE and education. We are using data to identify and predict product spend and frequency as we continue to broaden our range. In the longer term, disruption in the market will provide opportunities to add new lines and disrupt adjacent product segments - we will ensure we are well positioned to seize these opportunities.

· Building our solutions capabilities: As organisations globally are faced with more challenging markets, there is an increasing need for value-added solutions which help companies lower total cost of ownership and running costs via consolidating and driving leaner and efficient procurement as well as removing wasteful processes. We are accelerating activity to develop an IESA-like service for RS and Allied customers, called RS Plus. This will be aimed at customers, who do not want to fully outsource their procurement process but could benefit from a hybrid solution where they can access IESA's cloud-enabled proprietary marketplace solution, MyMRO, as well as our broader Group value-added solutions proposition. We are also continuing to roll out our existing value-added solutions across the globe.

2) Driving operational efficiency and scalability

Our aim is to proactively manage our cost base in the near term, whilst protecting the core of our business to take advantage of opportunities in both the short and longer term. In response to lower demand levels we are tightly managing our operating costs and limiting discretionary expenditure in areas such as travel and entertainment.

Looking forward, we will look to take the best of what we have learned from different ways of working during the COVID-19 crisis to make our organisation more nimble and efficient. We will also continue our work to simplify our organisation and build a lean and scalable operating model. We are on a journey to create a market beating proposition capable of disrupting our markets and accelerating share gains. During the year we have made further progress on this front with our three regions aligning around a common value proposition and go-to-market approach. This common approach allows us to further simplify the way we operate and, where possible, do things only once for the Group which will help us move faster and drive significant further savings in the longer term.

3) Managing our cash

In the highly uncertain COVID-19 environment we remain particularly focused on cash. Our business remains cash generative and we have levers we can pull to further improve cash generation, while ensuring we continue to remain well positioned for the recovery.

• Working capital measures: To date we have seen limited adverse impact from the COVID-19 crisis on our receivables collection. However, we continue to closely monitor collection metrics, as this remains our greatest short-term liquidity sensitivity. We continue to manage our inventory levels, so we can run the business as efficiently as possible, while ensuring we maintain inventory availability and are well positioned for a recovery when it does come. We will ensure we are well positioned to take advantage of attractive inventory purchasing opportunities as they arise.

• Capital expenditure: We are prudently reducing 2021 capital expenditure from the £80 million previously planned to around £60 million. Our Destination 2025 roadmap, including our work to build a more scalable and sustainable supply chain with our two DC expansions, remains a key priority for the Group. However, in light of the current macroenvironment, we are reprioritising our capital expenditure; slowing some less time sensitive projects while accelerating those projects which will deliver near-term returns.

• Dividend: Given the degree of COVID-19 related uncertainty the Board has deferred the decision on approving a final dividend until visibility improves. 

4) Financial resilience

We enter this period of uncertainty in a strong financial position with a healthy balance sheet with £350 million of facilities. In the first eight weeks of 2021, we have further improved our balance sheet flexibility and are in the process of securing additional contingency facilities with our relationship banks; and have secured eligibility to participate in the Bank of England Covid Corporate Financing Facility (CCFF).

Given the degree of uncertainty during the current environment we have performed stress tests under a range of potential scenarios of different duration and severity. The additional contingency facilities and CCFF have not been included in our stress test analysis. Our stress tests show that even in the event that a second wave of COVID-19 strikes during the second half of our financial year, resulting in limited recovery in revenue during the balance of the current financial year from that seen during the first eight weeks, we will continue to operate within our current banking facilities and financial covenants.

OVERALL RESULTS

(1) Like-for-like change excludes the impact of acquisitions and the effects of changes in exchange rates on translation of overseas operating results, with 2019 converted at 2020 average exchange rates. Revenue is also adjusted to eliminate the impact of trading days year on year. Acquisitions are only included once they have been owned for a year, at which point they start to be included in both the current and comparative periods for the same number of months.

(2) Adjusted excludes amortisation of intangible assets arising on acquisition of businesses, substantial reorganisation costs, substantial asset write-downs and one-off pension credits or costs (refer to Note 10 on pages 27 to 31 for reconciliations).

Revenue

Group revenue increased by 3.7% to £1,953.8 million (2019: £1,884.4 million). Adjusting for the year-on-year impact of acquisitions, additional trading days and foreign exchange movements, like-for-like revenue growth was 2.2%. This was driven by mid-single digit growth and share gains in industrial revenue, which offset weakness in electronics due to the slowdown in the electronics market. RS PRO, our own-brand range, which accounts for around 13% of Group revenue, outperformed the Group with like-for-like revenue growth of 8.9%. Digital, which accounts for around 63% of Group revenue, modestly underperformed with like-for-like revenue growth of 1.9% with strong growth in pay-per-click (PPC) revenue partially offset by weakness in search engine optimisation (SEO). OKdo, our single-board computing (SBC) and Internet of Things (IoT) business, which accounts for around 4% of Group revenue, sawlike-for-like revenue growth of 11.7%.

Group revenue growth was heavily weighted to the first half (H1 4.5%; H2 0.1%), with the second half revenue growth slowing due to weaker underlying markets and a sharp contraction in volumes during the final two weeks of the financial year, as increased restrictions on public mobility were put into place due to the spread of COVID-19. We estimate the Group saw around a percentage point negative impact on full year like-for-like revenue growth from the COVID-19 lockdown restrictions during March.

Gross margin

Group gross margin decreased by 0.8 percentage points to 43.7% (2019: 44.5%). As the negative impact from foreign exchange of 0.1 percentage points was offset by a positive impact from last year's acquisitions, the like-for-like decline was also 0.8 percentage points. This like-for-like decline in gross margin was primarily driven by mix with strong growth in higher margin RS PRO revenue more than offset by two key factors: firstly, lower growth in higher margin product areas and faster growth in lower margin products; and secondly, the impact of repositioning our electronics business and the launch and growth of OKdo, one of our lower gross margin businesses. We launched OKdo in April 2019 to drive a sharper focus on SBC and IoT in order to increase scale and improve mix in this high-growth area so that over time we can drive improved gross and operating profit margin from this business.

Operating costs

During 2020, we have made continued progress on driving underlying operating efficiencies, while significantly stepping up operating expenditure in areas such as digital, IT, talent, training and software to support our Destination 2025 strategy. This incremental strategic operating expenditure was just under £14 million during 2020 and our current expectation is that it will be around £10 million during 2021, however, we will continue to review and adjust this investment depending on the external operating environment. Total adjusted operating costs, which include regional costs and central costs (and exclude substantial reorganisation costs, substantial asset write-downs, amortisation of acquired intangibles and 2019's one-off pension costs), increased by 2.5%, 1.6% on a like-for-like basis, to £634.0 million (2019: £618.3 million). Stripping out the impact of the incremental strategic operating expenditure, adjusted operating costs modestly declined on a like-for-like basis with efficiencies driven by further progress in our global shared business services strategy and lower incentive costs more than offsetting increases in other costs related to volume, wage inflation, digital advertising and some additional costs related to COVID-19. During March 2020 the Group saw around £1 million of additional costs related to COVID-19, which included information technology costs to implement business continuity plans and extra supply chain costs in areas such as freight and labour. We expect the majority of these additional costs to continue while travel restrictions and social distancing safety measures remain in place.

Adjusted operating costs as a percentage of revenue reduced to 32.4% (2019: 32.8%) as revenue growth outstripped cost growth. However, adjusted operating profit conversion ratio fell by 0.5 percentage points to 25.8% (2019: 26.3%) as a result of both lower gross margin and the higher strategic operating expenditure. During the current period of uncertainty, we are tightly managing costs to protect our profit base alongside our ongoing work to further simplify our organisation and drive a lean and scalable model.

Substantial reorganisation costs

The Group incurred an additional £2.7 million of substantial reorganisation costs during the year as it completed the second phase of the Performance Improvement Plan. This was in addition to the £13.1 million of substantial reorganisation costs already incurred during 2019. These were primarily labour-related restructuring costs to implement the plan.

Substantial asset write-downs

As a result of British Steel Limited entering compulsory liquidation on 22 May 2019, the Group has written off £7.3 million of receivables relating to transactions with British Steel before 22 May 2019 which are no longer recoverable. This is lower than the £10.4 million written down at the half year as the inventory previously written down is now recoverable following the change in British Steel's ownership.

Amortisation of acquired intangibles

Amortisation of acquired intangibles was £5.4 million (2019: £4.4 million) and relates to the intangible assets arising on the acquisitions of IESA and Monition.

Operating profit

Operating profit grew 2.1% to £205.3 million (2019: £201.0 million). Excluding substantial reorganisation costs, substantial asset write-downs, amortisation of acquired intangibles and 2019's one-off pension costs, adjusted operating profit increased by 0.2% to £220.7 million. Adjusting for the year-on-year impact of acquisitions and the positive benefits from currency movements, adjusted operating profit saw a like-for-like decline of 0.5%. Adjusted operating profit margin fell by 0.4 percentage points, 0.3 percentage points on a like-for-like basis, to 11.3% (2019: 11.7%).

Regional performance

All three regions saw positive like-for-like growth trends in the full year with both EMEA and the Americas seeing a similar trend to the Group, with growth weighted to the first half. We continued to grow ahead of the underlying market in our key markets of the UK, France and the Americas and also in smaller markets such as Scandinavia, Iberia (Spain and Portugal), Australia and New Zealand (ANZ), South East Asia and Switzerland. Our outperformance continues to be driven by growth in customer numbers and average order value. Our Group rolling 12-month Net Promoter Score (NPS), a measure of customer satisfaction, rose a further 3.1% to 55.7 (2019: 54.0), as we continue to work towards a best-in-class customer experience through ease of use, personalisation, depth of range and high inventory availability. All three regions saw improved NPS scores during the year and our online customer satisfaction score, CSAT, also rose to 71 (2019: 69). We continue to improve our value-added solutions capabilities and our DesignSpark community now has 930,000 members.

Our regional presidents under our new Chief Operating Officer, Mike England, are increasingly collaborating to drive a more common go-to-market approach across our regions. This will allow us to leverage resources such as sales tools, value-added solutions and marketing materials across the Group to improve service, accelerate performance, reduce duplication and increase efficiency. We believe this common approach and the investments made during 2020 in areas such as digital, value-added solutions, DC infrastructure and inventories, position the Group well to continue to navigate these more challenging markets and emerge strongly.

EMEA

EMEA accounts for 64% of Group revenue and breaks down into four sub-regions: Northern Europe, Southern Europe, Central Europe and our emerging market operations. IESA's and Monition's results are included in Northern Europe. RS, RS PRO and IESA are our key trading brands in EMEA. Our largest offering of value-added solutions sits within EMEA and we continue to improve our proposition with a focus on making our customers' lives easier. A broad range of products and high inventory availability are key priorities for our customers. We differentiate our offering from that of the competition by providing a best-in-class online experience, supported by a knowledgeable salesforce, technical expertise, 24/7 customer support and value-added solutions.

(1) Like-for-like adjusted for currency and to exclude the impact of acquisitions; revenue also adjusted for trading days.

· Overall, EMEA revenue increased 2.5%, 2.2% on a like-for-like basis, to £1,239.8 million (2019: £1,210.0 million), driven almost entirely by market share gains against what was a tough market backdrop. Growth was weighted towards the first half (H1 5.4%; H2 (0.7)%) with the second-half performance impacted by weaker market conditions, particularly in Central Europe, and the impact of COVID-19 which led to double-digit like-for-like revenue declines in EMEA during the month of March.

· EMEA rolling 12-month NPS rose by 2.4% to 56.6 (2019: 55.3), as we continued to focus on driving an improved customer experience.

· Digital, which accounts for 73% of the region's revenue, grew at 3.0% on a like-for-like basis, higher than that of the region, driven by growth in PPC advertising which more than offset declines in SEO. The launch of the RS mobile-first responsive website during the first half of 2021 should help improve SEO performance going forward.

· RS PRO, which accounts for around 18% of the region's revenue, strongly outperformed with 8.9% like-for-like growth as greater focus was placed on improving content, introducing new products and driving revenue via sales incentives and reseller programmes across the sub-regions.

· EMEA saw gross margin decline year-on-year, predominantly driven by product mix as well as lower margin SBC business.

· Operating profit increased 1.8%, 2.1% on a like-for-like basis, to £197.0 million (2019: £193.5 million).

· Operating profit margin declined 0.1 percentage points to 15.9% (2019: 16.0%), with lower gross margin only partially offset by tight cost control. We continue to focus on driving efficiency in our operations in EMEA and during the year we moved c. 350 roles from across the region into our EMEA centre of expertise (COE) based in Corby, UK.

EMEA sub-regional revenue performance

(1) Like-for-like adjusted for currency and trading days and to exclude the impact of acquisitions.

We saw a strong performance across EMEA during 2020 against a tough market backdrop. All our sub-regions delivered market share gains during the period with our two largest sub-regions, Northern Europe and Southern Europe, seeing good like-for-like revenue growth trends. We saw a sharp slowdown in growth during the second half in all four sub-regions, due to some uncertainty in key markets such as Germany and the UK, and a contraction in demand during the final two weeks of the year due to the outbreak and spread of COVID-19. This impact was most significant in Southern Europe where restrictions on public mobility were most severe.

· Northern Europe (45% of EMEA revenue) is the largest sub-region within EMEA and consists of the UK, Ireland and Scandinavia. The UK is the main market in this sub-region, accounting for around 90% of the revenue. Northern European revenue increased by 2.9% on a like-for-like basis, to £552.5 million (2019: £529.5 million) driven predominantly by market share gain. Northern Europe remains the sub-region with the most developed value-added solutions proposition and saw outperformance in solutions such as eProcurement, calibration and RS ScanStock™, helping to drive share gains across the sub-region. IESA's growth during the year was impacted by reduced activity at two key clients, one of whom, British Steel, entered compulsory liquidation in May 2019, leading to £7.3 million of receivables being written off during the year which is not included in the region's operating profit. Looking forward, IESA's new business activity remains encouraging with recent wins including 3M, United Biscuits and Nestlé. We continue to test and pilot new solutions within the UK, which in time can be rolled out across the globe. During the year we piloted solutions in areas such as vending, smart factories, and procurement - where we introduced RS ConnectPoint™. In 2021, RS will continue to work together with IESA to not only support IESA's growth with the addition of new customers but also to develop new procurement and inventory management solutions for RS customers using IESA's cloud-enabled proprietary marketplace solution, MyMRO.

· Southern Europe (30% of EMEA revenue) consists of our operations in France, Italy and Iberia. France is the main market in this sub-region, accounting for approximately two-thirds of Southern Europe's revenue. Revenue increased by 1.7% on a like-for-like basis with good performance in both France and Iberia offsetting a weaker performance in Italy due to a tough market backdrop. Growth was driven by continued market share gains in France, with strong growth in RS PRO supported by progress on sales effectiveness andvalue-led selling programmes. Iberia saw like-for-like growth trends strengthen in the second half as its new commercial strategy focused on corporate customers and RS PRO paid dividends. Italy's performance remained volatile from month to month, however, good progress is being made in strengthening leadership, talent and salesforce effectiveness programmes in this market.

· Central Europe (21% of EMEA revenue) consists of our operations in Germany, Austria, Benelux, Switzerland and Eastern Europe. Germany is the main market in the sub-region accounting for approximately 60% of the revenue. Central Europe saw revenue decline 1.7%, impacted by weak underlying markets in Germany and Austria and in particular weakness in the automotive and electronics segments. This more than offset growth in smaller markets such as Switzerland, Poland and Hungary. Despite this more challenging backdrop, we continued to work to build the right culture, talent and infrastructure in the sub-region so we are well positioned for recovery. During the year we relocated our office in Germany to Frankfurt, moved our customer service activities to Austria and the UK and invested to strengthen our sales resource in thesub-region with a focus on building a more value-led sales culture. We have also made good progress on our project to expand and automate our DC in Bad Hersfeld, Germany - once finished this will give us a highly scalable engine to drive efficiencies in the future.

· Emerging market operations (4% of EMEA revenue) has operations in South Africa and third-party distributors in other territories. During 2020, the emerging market operations saw 21.9% like-for-like revenue growth which was primarily driven by good growth in South Africa as well as strong RS PRO and digital growth.

Americas

The Americas accounts for 26% of Group revenue. Allied Electronics & Automation is our main trading brand in the Americas, where we have operations in the US, together with smaller operations in Canada, Mexico and Chile. The Americas key focus remains on the automation and control market, however, over time our aim is to continue to broaden our range further into areas such as maintenance, repair and operations (MRO). Our broad range of America's franchises, leading digital presence and technical expertise in the Americas differentiate us from competitors that are primarily niche focused and digitally immature.

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

· The Americas revenue increased 6.6%, 2.1% on a like-for-like basis, to £515.7 million (2019: £483.6 million). During the second half, growth slowed to 0.8%, as we saw some increased volatility in trading and uncertainty around US-China tariff negotiations during the third quarter and a modest reduction in like-for-like revenue in March due to lower demand in the last two weeks as restrictions related to COVID-19 increased.

· The Americas rolling 12-month NPS score rose a further 3.6% to 72.2 (2019: 69.7) - the highest score of the regions - as it continued to focus on driving improvements in both offline and online customer experience.

· Digital, which accounts for 41% of the region's revenue, declined 0.4% on a like-for-like basis due primarily to customer mix.

· RS PRO continued to grow strongly from a low base. We remain focused on driving growth in RS PRO in the Americas and we continue to focus on driving salesforce engagement and improved content and range expansion to facilitate this.

· During the year we promoted Ken Bradley to become the new President for the Americas. Ken is a sixteen-year veteran of Allied, who has recently returned to the Americas following the completion of a two-year development programme in EMEA working for our CEO. He has already made significant changes in the Americas, with a focus on driving improved performance and faster share gains in the region. He has strengthened the leadership team with new appointments in areas such as sales, digital, marketing, finance and people. His initial focus includes building a more aspirational culture, improving marketing and customer acquisition and expanding the offer via building out the range in areas such as machine and facilities maintenance, as well as improving our value-added solutions offer. Revitalising the commercial organisation is a key priority and the team is advancing a programme to improve salesforce effectiveness and further align our go-to-market approach and sales processes with those of EMEA. The focus is to drive a value-led sales culture and leverage tools and processes to not only add new customers but also retain and develop them.

· The newly expanded DC in Fort Worth, Texas, is expected to open this summer. It will offer the potential to more than double our stocked range in the longer term, as well as significantly increasing the levels of automation in the DC, allowing us to drive scale at lower cost. We have also opened a new shared business services COE, within the enlarged DC building in Fort Worth, to drive improved service at lower cost.

· Gross margin saw a decline year on year due to product mix, with slower growth from higher gross margin products such as interconnect and electromechanical and increased sales of lower gross margin products such as SBC.

· Operating profit declined 6.9%, down 10.2% on a like-for-like basis, to £57.8 million (2019: £62.1 million) driven by the lower gross margin and salesforce investments more than offsetting revenue growth.

· Operating profit margin declined 1.6 percentage points, down 1.7 percentage points on a like-for-like basis, to 11.2% (2019: 12.8%).

Asia Pacific

Asia Pacific accounts for 10% of Group revenue and consists of four similarly sized sub-regions: ANZ, Greater China, Japan and South East Asia. RS and RS PRO are our key trading brands in Asia Pacific. Similar to EMEA, there is great potential for our Asia Pacific region to become the one-stop-shop partner of choice for industrial customers, offering a broad, localised range with strong technical expertise, an omni-channel approach and a growing range of value-added solutions.

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

· Overall, Asia Pacific revenue increased 3.9%, 2.7% on a like-for-like basis, to £198.3 million (2019: £190.8 million). Asia Pacific saw like-for-like revenue growth improve in the second half of the year to 3.4% versus the first half of 1.7% as it benefited from a rebound in Greater China and continued growth in South East Asia and ANZ in January and February. This strong start to the final quarter more than offset a weaker performance in March, as South East Asia and ANZ saw demand levels contract due to increased restrictions around COVID-19.

· Digital, which accounts for 57% of the region's revenue, declined 2.3% on a like-for-like basis due to weak SEO performance in Japan and continued challenges with our online experience in Greater China. Improving online experience in the region remains a high priority.

· RS PRO, which accounts for 13% of the region's revenue, saw strong like-for-like revenue growth of 7.3%, outperforming the region.

· Customer experience has been a key focus over the past year, with our rolling 12-month NPS score increasing a further 5.2% to 38.3 (2019: 36.4).

· Our new President of Asia Pacific, Sean Fredericks, is focused on driving further efficiency across the region by increasingly leveraging, where possible, on Group processes and resources and continuing to drive our shared business services strategy in the region. Some of these savings are being reinvested to improve our sales capabilities across Asia Pacific and to improve our local offer, websites and digital experience in Greater China and Japan.

· Gross margin saw a year-on-year decline predominantly due to product mix with strong growth in SBC during the second half.

· Operating profit rose 23.3% to £3.7 million (2019: £3.0 million) with strong improvement in the second half as we began to see the benefits of efficiency initiatives.

· Operating profit margin was up 0.3 percentage points, up 0.4 percentage points on a like-for-like basis, to 1.9% (2019: 1.6%) primarily due to cost reduction measures which more than offset the lower gross margin.

Central costs

Central costs are Group head office costs and include the Board, Group Finance and Group Professional Services & People that cannot be attributed to region-specific activity.

(1) Like-for-like adjusted for currency.

Central costs decreased by 1.3%, 1.6% on a like-for-like basis, to £37.8 million (2019: £38.3 million), as a reduction in both performance-related pay and share-based payments during the second half more than offset the increase in costs, including OKdo launch costs, that we had seen during the first half.

FINANCIAL REVIEW

Net finance costs

Net finance costs reduced slightly to £5.9 million (2019: £6.1 million). The increase in finance costs due to the adoption of IFRS 16 was offset by the additional capitalisation of finance costs as part of the expansion of the DCs in the Americas and Germany.

Profit before tax

Profit before tax was up 2.3% to £199.6 million (2019: £195.2 million). Excluding substantial reorganisation costs, substantial asset write-downs, amortisation of acquired intangibles and 2019's one-off pension costs, adjusted profit before tax was up 0.2% to £215.0 million (2019: £214.5 million), down 0.5% on a like-for-like basis.

Taxation

The Group's income tax charge was £44.9 million (2019: £47.1 million). The adjusted income tax charge, which excludes the impact of tax relief on substantial reorganisation costs, substantial asset write-downs, amortisation of acquired intangibles and 2019's one-off pension costs was £46.9 million (2019: £50.7 million), resulting in an effective tax rate of 21.8% on adjusted profit before tax (2019: 23.6%). One percent of the decrease in the effective tax rate is due to one-off tax credits which will not recur, and the balance is mainly due to mix.

Earnings per share

Earnings per share was up 3.9% to 34.7p (2019: 33.4p). Excluding substantial reorganisation costs, substantial asset write-downs, amortisation of acquired intangibles, 2019's one-off pension costs and associated income tax effects, adjusted earnings per share of 37.7p (2019: 37.0p) was up 1.9%, 1.1% on a like-for-like basis.

Adoption of IFRS 16

The Group adopted IFRS 16 'Leases' on 1 April 2019 with no restatement of comparatives. This increased 2020's operating profit by only £1.3 million but increased EBITDA by £16.9 million due to £15.6 million of depreciation of right-of-use assets. Also, the definition of net debt has been updated to include lease liabilities which has led to a £56.3 million increase in net debt and reduced return on capital employed by 1.2 percentage points at 31 March 2020. The adoption of IFRS 16 has increased the Group's free cash flow and adjusted free cash flow by £14.8 million for 2020 and increased the Group's adjusted operating cash flow conversion by 6.9 percentage points (see Note 1 on pages 22 and 23 for more detail).

Cash flow

(1) Adjusted excludes the impact of substantial reorganisation cash flows.

In May 2019, we announced our Destination 2025 strategy, which involved a series of initiatives to build the right inventory, DC infrastructure and technology to drive faster share gains and improved efficiency in the medium term. During 2020, we have accelerated investment in these strategic initiatives which impacted free cash flow during the year.

Cash generated from operations increased to £203.2 million (2019: £184.2 million) with higher EBITDA more than offsetting continued investment in inventories to drive revenue growth, reposition our electronics business for the medium term and support the launch of OKdo.

Net interest paid increased to £6.2 million (2019: £6.1 million). Income tax paid fell to £49.9 million (2019: £50.8 million) as changes in timing of UK tax payments, which resulted in an increase in tax payments in the first half, were offset by lower tax payments in the second half partly due to the write off of the receivables from British Steel Limited, tax refunds related to prior years and government approved COVID-19 deferrals of payments in France.

Net capital expenditure increased to £74.7 million (2019: £50.8 million) as we accelerated investment in our Destination 2025 strategic initiatives. Key investments during 2020 included the expansion and automation of our DCs in the Americas and Germany and the launch of our new document management system to improve content management. As a result of these projects, capital expenditure rose to 2.6 times depreciation (2019: 1.8 times) and well above our typical maintenance capital expenditure levels of closer to 1.0 times depreciation.

The investment in our Destination 2025 strategic initiatives led to lower free cash flow of £72.4 million (2019: £76.5 million). Adjusted free cash flow was £80.9 million (2019: £84.5 million) and excludes a net cash outflow related to substantial reorganisation activities of £8.5 million (2019: £8.0 million), which largely relates to labour restructuring charges. 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 six financial key performance indicators (KPIs), was 62.1% (2019: 64.2%).

Looking forward to 2021, given anticipated lower levels of demand due to COVID-19, we are taking actions to conserve cash. We have lowered our planned capital expenditure for the year to 31 March 2021 to £60 million versus the £80 million previously planned, as we defer some projects.

Working capital 

Working capital as a percentage of revenue increased by 1.7 percentage points to 23.9% (2019: 22.2%) as we continued investment in inventories to drive revenue growth, broaden our range, reposition our electronics business for the medium term and support the launch of OKdo.

Gross inventories increased to £446.6 million (2019: £415.0 million) while our inventory provisions stayed flat at £27.6 million (2019: £27.8 million) as we continued to improve our inventory management, including scrapping some heavily-provisioned articles, and better buying. Inventory turn reduced to 2.6 times (2019: 2.7 times) reflecting the investment in inventories and product mix.

Gross trade receivables reduced to £355.5 million (2019: £365.2 million) with a drop in sales in the last two weeks of the year due to COVID-19. Our outstanding receivable balance with British Steel Limited from transactions before it entered compulsory liquidation of £7.3 million was written off during the year. Except for this, the Group has historically experienced very low levels of trade receivables not being recovered, including those significantly past due. With the worsening macroeconomic environment due to COVID-19, we have doubled our trade receivable impairment allowance to £6.9 million (2019: £3.5 million).

Trade payables reduced to £241.1 million (2019: £257.8 million) as 2019 trade payables were inflated by the timing of payments for the investment in additional inventories to protect service levels around the UK's potential exit from the European Union without a withdrawal agreement.

Looking forward to 2021, we are actively managing our working capital position, with a particular focus on receivables collection, which remains our greatest short-term liquidity sensitivity. We have taken action to limit our exposure by tightening our credit policies, including short payment terms and low credit limits for new customers and seeking payment commitments for overdue balances before releasing new orders to existing customers. So far we are seeing limited adverse impact from the COVID-19 crisis on our receivables collection, however we continue to closely monitor collection metrics. On payables we will continue to pay to terms, while working with some of our larger suppliers on improved terms where possible. We will continue to actively manage our inventory position to reduce excess wherever possible, while ensuring we are well positioned to maintain service levels and continue to focus on opportunities as our markets recover.

Return on Capital Employed (ROCE)

Net assets at the end of the year were £719.9 million (2019: £589.3 million). ROCE, calculated using adjusted operating profit for the 12 months ended 31 March 2020 and year-end net assets excluding net debt and retirement benefit obligations, fell to 22.9% (2019: 27.7%). Of this decrease, 1.2 percentage points was due to the adoption of IFRS 16 on 1 April 2019 and the balance was due to increased strategic investment in inventories, technology and DC infrastructure.

Net debt

We enter this period of uncertainty in a strong financial position with a cash generative business model.

At 31 March 2020, net debt was £189.8 million. This was £67.4 million higher than at 31 March 2019 due primarily to the inclusion of lease liabilities of £56.3 million as a result of the adoption of IFRS 16. Net debt comprised gross borrowings of £391.6 million offset by cash and short-term deposits of £200.8 million and interest rate swaps with a fair value of £1.0 million.

At 31 March 2020, the Group had committed debt facilities and loans (excluding lease liabilities) of £350.0 million, of which £189.2 million was undrawn. These debt facilities comprise of:

· £189.6 million syndicated multi-currency bank facility which has a maturity of August 2022.

· £160.4 million of private placement loan notes with maturities ranging between October 2026 and October 2031.

Since the year end, to increase liquidity, the Group has secured eligibility to participate in the Bank of England CCFF and is negotiating an additional bank facility with the Group's relationship banks. We have no current intention to draw on these additional contingency facilities and so they are not included in our viability modelling.

The Group's financial metrics remain strong, with net debt to adjusted EBITDA of 0.7x and EBITA to interest of 33.6x. This leaves significant headroom to the Group's banking covenants of net debt to adjusted EBITDA less than 3.25 times and EBITA to interest of greater than 3 times.

Retirement benefit obligations

The Group has defined benefit pension schemes 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.

Overall, the accounting deficit of the Group's defined benefit schemes at 31 March 2020 was £55.8 million compared to £59.9 million at 30 September 2019 and £83.6 million at 31 March 2019.

The UK defined benefit scheme had a small accounting deficit of £2.1 million (2019: £69.4 million) but an additional liability of £41.2 million was recognised as the present value of the agreed future contributions under the recovery plan was greater than the funded status. The decrease in the UK scheme's deficit was principally due to a reduction in liabilities resulting from a decrease in the inflation-linked assumptions and a change in mortality assumptions in line with the basis agreed for the triennial funding valuation at 31 March 2019.

The triennial funding valuation of the UK scheme at 31 March 2019 showed a deficit of £44.7 million on a statutory technical provisions basis. A new recovery plan was agreed with the trustee of the UK scheme with deficit contributions paid with the aim that the scheme is fully funded on a technical provisions basis by March 2022. These deficit contributions started in 2020 and consist of an annual contribution of at least £10 million, increased each 1 April by the increase in the Retail Prices Index (RPI) for the year to the preceding December, plus an additional contribution of £25 million. This additional contribution can be paid in instalments and paid as and when we deem appropriate, provided the total additional contribution has been paid no later than 31 March 2022. We paid deficit contributions of £10.0 million in 2020 under the new recovery plan, instead of the £7.7 million we had expected to pay under the previous recovery plan.

Dividend

As a result of the COVID-19 pandemic, the current operating environment for all businesses across the globe is one of heightened uncertainty. Notwithstanding the robust trading position and the Group's strong balance sheet, the Board believes it is prudent to defer the decision on the final dividend for the year ended 31 March 2020 until it has greater visibility and the impact of COVID-19 on activity levels and cash generation in our key markets have become clearer.

The Board recognises the importance of its progressive dividend policy to its shareholders and will therefore review making an additional interim dividend payment related to the year ended 31 March 2020 at the Group's half-year results in November 2020.

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 adjusted profit before tax by £1.4 million and a one cent movement in the US dollar would impact annual adjusted profit before tax by £0.5 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 seven 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. 

RISKS AND UNCERTAINTIES 

The Board has overall accountability for the Group's risk management, which is managed by the Senior Management Team (SMT) and co-ordinated by the Group's risk team. The Group's risk management process identifies, evaluates and manages the Group's principal risks and uncertainties. These are reviewed by both the Group's Risk Committee, comprising the Group's senior managers, and the Board, which regularly discusses the principal risks and receives risk reports covering risk mitigations and controls.

The Group has a defined risk appetite, which has been adopted by the Board, and is considered across three risk categories: strategic, regulatory / compliance and operational. These categories use both quantitative and qualitative criteria.

Principal risks and uncertainties

The Group has identified 11 principal risks: 10 similar to those disclosed last year, with only minor changes; and one additional risk being the uncertainty relating to the duration and effects of the COVID-19 pandemic.

Strategic risk category

1. Consequences of the COVID-19 pandemic

2. Consequences of the UK exit from the EU

3. Failure to respond to strategic market shifts e.g. changes in customer demands / competitor activity and related stakeholder requirements

4. The Group's revenue and profit growth initiatives are not successfully implemented

Regulatory / compliance risk category

5. Failure to comply with international and local legal / regulatory requirements

Operational risk category

6. Failure in the business's critical infrastructure

7. Prolonged system outage

8. Information loss / cyber breach

9. UK defined benefit pension scheme cash requirements are in excess of cash available

10. People resources unable to support the existing and future growth of the business

11. Impact on the business if the macroeconomic environment deteriorates

Two of the Group's principal risks require further explanation: the consequences of the COVID-19 pandemic and the UK's exit from the EU.

COVID-19 pandemic

The COVID-19 pandemic is having far-reaching, and still-developing, impacts across the world. These effects are both on our personal ways of life and on business activities.

The Group has responded well and implemented its crisis management and business continuity processes quickly. At present all our DCs around the world are open and operating effectively. Our online business model continues to differentiate us and has helped us to continue to serve our customers.

The pandemic is affecting some of our other, already identified, principal risks e.g. employee physical and mental health and information loss / cyber breach.

New principal risk

The pandemic has its own specific uncertainties therefore we have disclosed it as a separate principal risk. These uncertainties include:

· Reductions in demand across our diverse customer base, some of which may take time to become completely apparent across different sectors.

· The risk of a deterioration in cash flow specifically the recoverability of trade receivables, which is a key liquidity sensitivity.

· Delays and difficulties sourcing inventory as suppliers' production capabilities are affected by the pandemic and demand for certain product types exceeds the available capacity.

· Significant transport constraints and resulting increased costs; in particular for air freight, with the substantial reduction in passenger flights which carry around half of all air cargo. This has impacted the Group's activities for transporting inventory across its supply chain.

· The uncertainty about the duration of the worldwide disease control activities, principally the significant people lockdowns, and the consequences on demand levels. This extends to the risk of further outbreaks of the virus (or a "W" scenario).

· The difficulties managing the business's return to partial office-based working as respective governments' restrictions on people movement are eased.

· When the pandemic passes, the speed and extent to which industries can recover from the effects is unclear.

· The longer-term effects of the pandemic both on business activity and government finances and related levels of public expenditure.

Mitigating actions

There are some structural factors, including the diverse nature of our customer base and our strong online capabilities, that have helped protect the business from some effects of the pandemic and enabled us to continue to support customers during the pandemic.

The business has taken a number of mitigating actions including:

· A rapid implementation of the Group's crisis management and business continuity plans with most of our office-based staff working from home, and protection for our DC employees.

· Swift cost actions taken to protect profit including controls on procurement and discretionary spend.

· A focus on maintaining cash flow. Tight working capital management including related controls over customer credit and conversion of trade receivables into cash and other actions to reduce capital expenditure.

· Actions to improve balance sheet flexibility including securing additional funding facilities.

· Supporting employees' physical safety in our DCs and mental wellbeing for those during extended periods of home working.

· Refocused cyber monitoring and training reflecting the changed business working environment and increased external threats.

Other activities include business planning for the trading environment following the passing of the pandemic to ensure that the Group can provide the necessary levels of customer service to meet customer demands and quickly identify and develop opportunities.

The effectiveness of the business's operational controls in the current COVID-19 environment are being reviewed by the Group's internal audit team on a risk-based approach.

The UK exit from the EU

The principal risk which has been subject to ongoing focus and activity in the Group during the financial year has been that associated with the UK's exit from the EU. The Group has undertaken a number of significant activities across many business areas to mitigate, insofar as is possible, any potential and negative, future effects of the UK leaving the EU. The planning and actions involved considering various scenarios for the UK's exit. These scenarios looked beyond the current transition period and the potential relationship between the UK and the EU. These included a more significant and immediate UK exit from the EU without agreed trading arrangements. In such a case the UK trading relationship with the EU would be governed by World Trade Organisation (WTO) rules (this is often termed as Hard Brexit).

We judge the key risk to our business from the UK exiting the EU without agreed trading agreements to be across four key areas. In each of these four areas we have undertaken mitigating actions to attempt to reduce the impact of these risks on the business.

1) Reduced free movement

A restriction on the smooth passage of goods across the UK / EU border leading to disruption to customer service is a key risk.

· In anticipation of a UK exit from the EU without a withdrawal agreement earlier in calendar year 2019 and potential delays at the UK / EU border, we invested in additional fast-moving inventory across our European network to lessen any customer service impact. This investment would be reinstated if there was a risk of such delays following the UK's exit in December 2020.

· We have established combined contingency plans with our freight forwarders to protect service levels in the event of a hard Brexit.

· In the medium term, the expansion of our DC in Bad Hersfeld, Germany will provide increased inventory capacity in Continental Europe and reduce the impacts on the business of reduced free movement of goods across the UK / EU border.

2) Increased tariff and duty costs

Following the UK's exit from the EU, goods moving between the UK and EU member states and potentially other areas of the world may be subject to additional tariff and duty costs. At this stage, before we know the detail of any exit deal and any reciprocal agreements, the exact impact of tariffs is difficult to assess. However, we believe the more notable area of risk is for goods sourced from the EU into the UK or where products are shipped from the UK to the EU.

· We have reviewed our current transport routes against individual product demand and will use our international distribution network to mitigate this risk, as best we can, to continue to offer our customers the market-leading service they expect.

· We have reviewed the potential tariff impacts on our top-selling product lines to optimise product sourcing to mitigate any incremental duty impact. Where this is not possible we will look to pass on tariffs and duties in the form of price increases.

3) Increased administration

We anticipate increased requirements for data collection as shipments move across the UK / EU border. More information may be required for customs declarations and import / export forms for each consignment shipped into the EU. We could also be required to make additional payments for customs clearance charges for goods moving across the UK / EU border.

· We have invested in IT systems to automate the customs declaration process.

· We have reviewed our current people resources to support our existing skilled export teams as required.

4) Sterling depreciation

Sterling could depreciate materially in the event of the UK leaving the EU on 31 December 2020 with no agreed trading arrangements in place.

· To hedge against transactional foreign exchange risk, we currently maintain three to seven months of cover against freely tradeable currencies to smooth the impact of fluctuations in currency. We will maintain our existing hedging strategy to mitigate against any immediate devaluation in sterling.

· Our global trading mix and product sourcing arrangements mean that historically we have had a natural gross margin hedge against a depreciation in sterling at a Group level.

Emerging risks

During the Board's Group risk reviews, we also consider developing risk themes and emerging risks.

One important such risk is climate change. Work continues to investigate the potential implications of an increase in global temperatures upon the Group. This includes the impact on the Group's operations, customers and supply chain. These risks span physical, regulatory, market, technology and reputation risks.

GROUP INCOME STATEMENT

For the year ended 31 March 2020

GROUP STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 March 2020

GROUP BALANCE SHEET

As at 31 March 2020

* represented to show retirement benefit net assets separately to retirement benefit obligations.

GROUP CASH FLOW STATEMENT

For the year ended 31 March 2020

GROUP STATEMENT OF CHANGES IN EQUITY

For the year ended 31 March 2020

NOTES TO THE CONDENSED GROUP 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 2020 or 31 March 2019 but is derived from those accounts. The accounts are prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the IFRS Interpretations Committee (IFRIC) as adopted by the European Union. Except as described below, they have been prepared on the basis of the accounting policies set out in the Annual Report and Accounts for the year ended 31 March 2019. Statutory accounts for 2019 have been delivered to the Registrar of Companies and those for 2020 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 2020 were approved by the Board of Directors on 1 June 2020.

Changes in significant accounting policies

IFRS 16 'Leases' has a material effect on the Group's financial position as explained below. The Group has also adopted International Financial Reporting Interpretations Committee (IFRIC) 23 'Uncertainty over Income Tax Treatments' and Amendments to IFRS 9, IAS 39 and IFRS 7 'Interest Rate Benchmark Reform' as explained below. There are no other new standards or amendments to standards that have been adopted that have a material impact on the reported results or financial position of the Group.

IFRS 16 'Leases'

The Group adopted IFRS 16 'Leases' on 1 April 2019 which resulted in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases has been removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals discounted to present value are recognised. The only exceptions are short-term leases and leases of low-value assets which are both recognised on a straight-line basis over the lease term as an operating expense. Initial adoption resulted in the recognition ofright-of-use assets of £52.3 million and lease liabilities of £53.3 million with a weighted average incremental borrowing rate of 2.0% at 1 April 2019.

The Group has applied the new standard retrospectively with the cumulative effect of applying the new rules recognised in equity as an adjustment to the opening balance of retained earnings on 1 April 2019 and with no restatement of comparative information. Lease liabilities were measured at the present value of the remaining lease payments discounted at the relevant incremental borrowing rate at 1 April 2019. The Group elected on alease-by-lease basis whether to measure the right-of-use asset at its carrying amount as if IFRS 16 had applied since the start of the lease discounted using the relevant incremental borrowing rate at 1 April 2019, or at the same value as the lease liability adjusted for any prepaid or accrued lease payments.

In applying IFRS 16 for the first time, the Group has used the following practical expedients:

• to apply this standard to contracts that were previously identified as leases under International Accounting Standard (IAS) 17 'Leases' and IFRIC 4 'Determining whether an Arrangement contains a Lease' and not to apply IFRS 16 to leases which were not identified as containing a lease under IAS 17 or IFRIC 4.

• to treat leases with a remaining lease term of less than 12 months at 1 April 2019 as short-term leases.

• to exclude initial direct costs from the measurement of the right-of-use assets at 1 April 2019, applied on alease-by-lease basis.

• to use hindsight in determining the lease term where the lease contains an extension or termination clause.

Judgements were made in calculating the initial impact of adoption including determining the lease term where extension or termination options exist. In such instances, all facts and circumstances that may create an economic incentive to exercise an extension option, or not exercise a termination option, were considered to determine the lease term. Extension periods (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).

1. Basis of preparation (continued)

The impact of the adoption of IFRS 16 on the opening balance sheet as at 1 April 2019 is:

The accounting for leases under IFRS 16 has resulted in higher operating profit, with a lower lease expense partly offset by depreciation of the right-of-use asset, and higher finance costs due to the unwinding of the discount on the present value of the liability. This is immaterial with operating profit for the year ended 31 March 2020 increasing by £1.3 million and finance costs increasing by £1.1 million, with a net increase to profit before tax of £0.2 million.

Depreciation of right-of-use assets was £15.6 million and so EBITDA increased by £16.9 million. The definition of net debt has been updated to include lease liabilities as a result of IFRS 16 and so net debt increased by £56.3 million at 31 March 2020. As a result, net debt to adjusted EBITDA increased by 0.2. IFRS 16 has no impact on the covenants of the private placement loan notes and bank facilities that existed at 1 April 2019 as they are on frozen GAAP. Return on capital employed decreased by 1.2 percentage points.

There is no net cash flow impact arising from the adoption of IFRS 16, although payment of lease liabilities has moved from operating activities to financing activities and so some of the Group's alternative performance measures have been affected. Under IFRS 16 the Group's free cash flow and adjusted free cash flow for the year ended 31 March 2020 have increased by £14.8 million and the adjusted operating cash flow conversion increased by 6.9 percentage points.

IFRIC 23 'Uncertainty over Income Tax Treatments'

The Group adopted IFRIC 23 'Uncertainty over Income Tax Treatments' on 1 April 2019 and has consequently measured the effect of uncertainty on income tax positions using either the most likely amount or the expected value amount depending on which method is expected to better reflect the resolution of the uncertainty.

The Group has applied the new interpretation retrospectively with the cumulative effect of applying the new rules recognised in equity as an adjustment to the opening balance of retained earnings on 1 April 2019 and with no restatement of comparative information. This increased current income tax assets by £4.8 million and current income tax liabilities by £4.1 million at 1 April 2019 with a corresponding increase to retained earnings of £0.7 million.

Amendments to IFRS 9, IAS 39 and IFRS 7 'Interest Rate Benchmark Reform'

With effect from 1 April 2019, the Group has early adopted Amendments to IFRS 9, IAS 39 and IFRS 7 'Interest Rate Benchmark Reform'. These amendments modify specific hedge accounting requirements to allow hedge accounting to continue for affected hedges during the period of uncertainty before the hedged items or hedging instruments referencing the current interest rate benchmarks are amended as a result of the ongoing interest rate benchmark reforms. There was no material impact on the reported results or financial position of the Group.

2. Segmental reporting

The Group's operating segments comprise three regions: EMEA, the Americas and Asia Pacific.

In the table below, revenue is disaggregated by major products / services and sales channels. Of Electronic products / services' revenue £360.1 million is recognised at a point in time and £1.2 million over time (2019: £369.6 million recognised at a point in time and £1.4 million over time). Of Industrial products / services' revenue £1,575.8 million is recognised at a point in time and £16.7 million over time (2019: £1,497.3 million recognised at a point in time and £16.1 million over time).

3. Substantial reorganisation costs

The Group launched a second phase to the Performance Improvement Plan (PIP) in May 2018 which was concluded during the year and gave rise to substantial reorganisation costs in several of the Group's regions and activities. Substantial reorganisation costs are excluded from adjusted performance measures.

4. Earnings per share

5. Dividends

6. Inventories

The inventory provision at 30 September 2019 included £3.2 million against inventories recovered from British Steel Limited on it entering compulsory liquidation on 22 May 2019. This has been reversed as it is now recoverable following the change in British Steel's ownership.

As a result of the Group's strategic investments in electronics inventory, the methodology used to estimate the net realisable value of inventories was updated in order for it to continue to reflect commercial reality. The overall effect on the estimation of net realisable value as a result of these investments and updating the methodology was not material.

During the year ended 31 March 2020 £6.4 million (2019: £8.0 million) was recognised as an expense relating to the write-down of inventories to net realisable value.

Currently the Group does not expect the COVID-19 pandemic to have a material impact on the net realisable value of inventories.

7. Trade and other receivables

Trade receivables are written off when there is no reasonable expectation of recovery. Except for British Steel Limited, as described below, the Group has historically experienced very low levels of trade receivables not being recovered, including those significantly past due. With the worsening macroeconomic environment due to COVID-19, the Group has increased its expected loss rates for those markets and industries that are most affected, which has resulted in the trade receivables impairment allowance increasing. The Group has taken action to limit its exposure by tightening its credit policies, including short payment terms and low credit limits for new customers and seeking payment commitments for overdue balances before releasing new orders to existing customers.

As British Steel Limited entered compulsory liquidation on 22 May 2019, the Group has written off £7.3 million of receivables relating to transactions with British Steel Limited before 22 May 2019 which are no longer recoverable. This write off has been excluded from adjusted performance measures.

8. Net debt

Movements in net debt were:

9. Retirement benefit obligations

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

Based on the UK scheme's rules, the Group does not have an unconditional right to any surplus that may arise on the scheme and so IFRIC 14 applies. At 31 March 2020, the present value of the contributions due under the recovery plan to the UK scheme was greater than the funded status and so the Group has recognised an additional liability of £41.2 million.

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 and are not intended to be a substitute for any IFRS measure. The Directors believe that the APMs are important when assessing the underlying financial and operating performance of the Group. The APMs are used internally for performance analysis and in employee incentive arrangements, as well as in discussions with the investment analyst community.

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 operational or management activities that the Directors would consider part of underlying performance. The Directors also believe that excluding recent acquisitions and acquisition-related items aid comparison of the underlying performance between reporting periods and between businesses with similar assets that were internally generated.

Base business

The Group's base business excludes acquisitions in the relevant years until they have been owned for a year, at which point they start to be included in both the current and comparative periods for the same number of months. Our acquisitions were purchased during the year ended 31 March 2019.

10. Alternative Performance Measures (APMs) (continued)

Like-for-like revenue growth

Like-for-like revenue growth is growth in revenue adjusted to eliminate the impact of acquisitions and changes in exchange rates and trading days year on year. It is calculated by comparing the revenue of the base business for the current year with the prior year 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.

Gross margin and like-for-like gross margin change

Gross margin is gross profit divided by revenue. Like-for-like change in gross margin is calculated by taking the difference between gross margin for the base business for the current year and gross margin for the prior year with revenue and gross profit converted at the current year's average exchange rates.

Like-for-like profit change

Like-for-like change in profit is adjusted to exclude the effects of changes in exchange rates on translation of overseas profits. The change is calculated by comparing the base business for 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:

10. Alternative Performance Measures (APMs) (continued)

Adjusted profit measures

These are the equivalent IFRS measures adjusted to exclude amortisation of intangible assets arising on acquisition of businesses, substantial reorganisation costs, substantial 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) Operating profit conversion is operating profit expressed as a percentage of gross profit.

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 one-off pension costs, substantial asset write-downs and substantial reorganisation costs.

The adoption of IFRS 16 resulted in net debt to adjusted EBITDA increasing by 0.2x (Note 1).

Earnings before interest, tax and amortisation (EBITA) and EBITA to interest

EBITA is adjusted EBITDA after depreciation. EBITA to interest is the ratio of EBITA to finance costs including capitalised interest less finance income.

The adoption of IFRS 16 resulted in EBITA to interest decreasing by 5.9x. 

10. Alternative Performance Measures (APMs) (continued)

Return on capital employed (ROCE)

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

The adoption of IFRS 16 resulted in ROCE decreasing by 1.2 percentage points (Note 1).

Ratio of capital expenditure to depreciation

Ratio of capital expenditure to depreciation is capital expenditure divided by depreciation and amortisation excluding amortisation of acquired intangibles and depreciation of right-of-use assets.

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

Free cash flow is the net movement in cash and cash equivalents before net cash used in financing activities, acquisition of businesses and cash and cash equivalents acquired with businesses. 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.

The adoption of IFRS 16 resulted in free cash flow and adjusted free cash flow increasing by £14.8 million and adjusted operating cash flow conversion increasing by 6.9 percentage points (Note 1).

10. Alternative Performance Measures (APMs) (continued)

Inventory turn

Inventory turn is cost of sales divided by inventories.

Working capital as a percentage of revenue

Working capital is inventories, current trade and other receivables and current trade and other payables.