ECM.L Regulatory News (ECM)

25 May 2005 07:00

Electrocomponents PLC25 May 2005 Embargoed to 7:00am, Wednesday 25 May 2005 PRELIMINARY STATEMENT Electrocomponents plc, the major international high service distributor of electronic, electromechanical,electrical, industrial and commercial supplies, today announces its results for the year ended 31 March 2005. SUMMARY RESULTS Adjusted *Sales £773.9m up 1.9% up 4.5%Before amortisation of goodwillOperating profit £105.3m down 2.9% down 1.7%Profit before tax £104.4m down 2.5% down 1.2%Earnings per share 17.0p down 2.9%After amortisation of goodwillOperating profit £95.9m down 2.4%Profit before tax £95.0m down 2.0%Earnings per share 14.9p down 2.0%Dividend per share 18.4p up 1.1%Free cash flow £61.1m down 26.4%Net debt £55.4m up by £20.9m_________________________________________________________________________________________________________ * Adjusted for changes in exchange rates, UITF 38, Accounting for ESOP Trusts and (for sales) trading days HIGHLIGHTS • Group results in line with Trading Update issued on 22 March 2005 • Sales up 4.5% with good growth in North America, Japan and Asia offset by lower growth in the UK and Europe • Operating return on sales remained high at 13.6% despite pressure on gross margin and increased selling and marketing costs • Strategy developed to refocus on key customer groups and reduce costs • EBS projects making good progress • Board intends to maintain dividend at current level for next three years CURRENT TRADING AND OUTLOOK Bob Lawson, Chairman, commented: "The Board is intent on delivering a sustainable and growing profit stream. We are announcing the next stage of theGroup's development, which will achieve the Board's objectives by focusing on the key customer groups in each marketserved and reducing costs. A key enabler is the Enterprise Business System and its implementation this year in theUK is a major task. The Group does have a track record of executing change well. Since the year end, trading has remained strong in North America, Asia, Japan and the smaller European markets butit has continued to be depressed in the UK and our main European markets. The leading indicators suggest a difficulttrading environment in most of our markets and so we remain cautious on the outlook for the coming year." Enquiries: Bob Lawson, Chairman Electrocomponents plc 0207 567 8000*Ian Mason, Chief Executive Electrocomponents plc 0207 567 8000*Jeff Hewitt, Deputy Chairman / Finance Director Electrocomponents plc 0207 567 8000*Diana Soltmann Flagship Consulting Ltd 0207 886 8440 * Available to 15:00 on 25 May, thereafter 01865 204000 The results and presentation to analysts with accompanying audiocast are published on the corporate website atwww.electrocomponents.com Notes on the Preliminary Statement: Definitions of terms: In order to reflect underlying business performance, comparisons of sales and profits betweenperiods have been adjusted as follows unless otherwise stated: • changes in sales are adjusted for exchange rates and the number of trading days • changes in profits are adjusted for exchange rates and for the prior year restatement for the adoption of UITF 38 (Accounting for ESOP Trusts); and • changes in cash flow, debt and share related measures such as earnings per share are at reported exchange rates. Safe Harbour: Our preliminary statement contains certain statements, statistics and projections that are or may beforward-looking. The accuracy and completeness of all such statements, including, without limitation, statementsregarding the future financial position, strategy, projected costs, plans and objectives for the management of futureoperations of Electrocomponents plc and its subsidiaries is not warranted or guaranteed. These statements typicallycontain 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 thatwill occur in the future. Although Electrocomponents plc believes that the expectations reflected in such statementsare reasonable, no assurance can be given that such expectations will prove to be correct. There are a number offactors, which may be beyond the control of Electrocomponents plc, which could cause actual results and developments todiffer materially from those expressed or implied by such forward-looking statements. Other than as required byapplicable law or the applicable rules of any exchange on which our securities may be listed, Electrocomponents plc hasno intention or obligation to update forward-looking statements contained herein. CHAIRMAN'S STATEMENT ON THE PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2005 SUMMARY OF GROUP RESULTS The results for the year were in line with the expectations set out in our Trading Update of 22 March 2005. Groupsales increased by 4.5% to £773.9m. Sales improved in all regions in the first half but the trading environmentdeteriorated as the second half progressed and the sales growth rate reduced. Operating profit before tax and goodwill of £105.3m for the full year, remained high at 13.6% of sales though wasdown from 14.3% last year. This reflected a lower gross margin, higher systems project costs, increased sales andmarketing investment and higher pension costs. Profit contribution from the UK declined by £10.3m and offsetcontribution increases elsewhere. Profit before tax and goodwill was £104.4m, down 1.2% (adjusted) on prior year.Earnings per share before goodwill amortisation was 17.0p, down from 17.5p last year. Free cash flow of £61.1m was £21.9m below last year due to the systems project and higher stock to support highercustomer service levels. Net debt was £55.4m at the year end compared with £34.5m last year. STRATEGY During the year, our strategy has evolved in response to comprehensive customer research and a complete review ofour infrastructure costs. Our objective remains to grow all our businesses around the world and we will do thisfaster by focusing on two customer groups where we have particular strength. Following the successful implementationof the Enterprise Business System (EBS), a lower cost infrastructure will be created. The strategy and costinitiatives will have a substantial positive impact on the medium term financial performance of the Group. Electronic and Electromechanical (EEM) The Group will focus on the EEM market and improve the competitiveness of its offer in meeting the needs of R&D andmaintenance engineers around the world. RS is recognised by customers as a leader in this market, however, thecompetitiveness of our offer has declined as we have focused on developing other technologies and competition hasimproved. Refocusing on this core strength will drive faster sales growth, through protecting existing business andour ability to exploit an improved offer through all our businesses. A plan to develop the offer is beingimplemented. Convenient and Urgent (C&U) The Group generates significant revenue from customers who value convenience (one-stop-shop) or have an urgentproduct need ("can't find it"). Our offer will be optimised to meet the needs of these customers and the cost toserve reduced. Actions to improve our competitiveness will be implemented, including improving our price perception,increasing our flexibility in meeting customers' needs, greater leverage of e-Commerce and improving our Sales andMarketing effectiveness. Geographic Portfolio Strategy Our businesses around the world will be managed differently depending on their stage of development and scale ofgrowth opportunity. Our UK and main European markets need to perform. We will continue to invest to develop themassive market potentials in the US, China and Japan where we have strong established businesses. The smallermarkets will be free to develop their potential through the continuation of their existing high growth. The primaryfocus of the strategy is creating and deploying a world-class EEM offer through all businesses. INFRASTRUCTURE AND EBS The Group is a high service, high cost, high return business. Our costs have increased as we have built a globalinfrastructure and invested heavily ahead of growth. EBS is the final piece of the infrastructure build and issignificantly increasing our costs over several years. Good progress is being made on the implementation of EBS intothe UK business including Group Processes. A strong delivery team, high level of business engagement and clearprogress against the plan, including the very smooth introduction of our first major upgrade into France, reaffirmour confidence in implementation and benefits realisation. Following the successful implementation of EBS, a lower cost infrastructure will be created through sales growthgenerating economies of scale, the decline of EBS costs, EBS benefits and specific cost reduction initiatives. FINANCIAL CONSEQUENCES The Board believes the actions we are taking will lead to a substantial improvement in the Group's medium termfinancial performance. The operating profit impact of the EBS implementation will peak over the next two years and will then reducesignificantly due to reduced costs and to benefits realisation. The cash flow impact peaks in the coming year andthen will improve considerably as depreciation replaces capital expenditure and cost. The successful implementationof EBS will also enable the strategy and other cost reduction initiatives. We estimate that the refocusing of the strategy on EEM and C&U markets should generate c. £20m of additional profitsannually within three years. Higher sales growth at reasonable margins and economies of scale from leveraging theinfrastructure will all contribute to the improvement in profitability. Annual cost savings of c. £10m will be sought within the same time period from simplifying the business structureconsistent with the strategy and the capabilities provided by EBS. One-off costs will be incurred to make thesechanges, probably over the next two years, however it is premature to determine the scale of these costs. Cash flow will benefit from the higher profits and working capital efficiencies. DIVIDEND The Board recommends that the final dividend per share for the year be the same as last year (12.6p) to give 18.4pfor the full year, an increase of 1.1%. Dividend growth in recent years has been based on our view that the high cash generation of the Group, the strongbalance sheet and the expectation of reasonably consistent profit growth would permit most of the earnings and cashflow to be distributed as dividend. Profits have not developed as expected, particularly in the UK and Europe, andin light of the strategic review the dividend policy has been reassessed. The Board recognises the importance of dividends to shareholders and is confident that the successful implementationof EBS, execution of the strategy and cost reduction initiatives will significantly improve financial performanceover the next three years. Consequently, assuming no substantial deterioration in economic conditions, the Board hasdecided that it should maintain the current level of dividend during these three years. To the extent necessary, thestrength of the balance sheet will be used to support the dividend. BOARD CHANGES As announced on March 22nd, Jeff Hewitt, the Group Finance Director, wishes to seek early retirement from the Boardin order to develop his career beyond executive duties. Jeff has been Finance Director for nine years and has played a major role in all the Group activities from beingactive in strategy execution to Y2K and the launch of the Euro. Latterly, Jeff has played a leading role in thedevelopment of the EBS together with strengthening and developing the financial management and investor relationsactivity of the Group. Jeff has been a tremendous colleague, catalyst and mentor to all in the Group who have had the pleasure of workingwith him, and we wish him continued success in his new career direction. Our search for Jeff's replacement has been successful, and I am delighted to announce that Simon Boddie, FinanceDirector of Key Markets for Diageo, will be joining us during the summer. Simon brings much relevant experience,particularly of rapidly changing international markets, which will be of direct benefit to the Group. Jeff will be staying with the Group to ensure a comprehensive hand over to Simon. It is also a great pleasure to welcome Kevin Abbott to the Board. Kevin is CEO of Alpha Airports and not only bringscurrent experience of a demanding service industry but also a breadth of relevant international knowledge. In theshort time that Kevin has been on the Board, he has made a significant contribution. CURRENT TRADING AND OUTLOOK The Board is intent on delivering a sustainable and growing profit stream. We are announcing the next stage of theGroup's development, which will achieve the Board's objectives by focusing on the key customer groups in each marketserved and reducing costs. A key enabler is the Enterprise Business System and its implementation this year in theUK is a major task. The Group does have a track record of executing change well. Since the year end, trading has remained strong in North America, Asia, Japan and the smaller European markets butit has continued to be depressed in the UK and our main European markets. The leading indicators suggest a difficulttrading environment in most of our markets and so we remain cautious on the outlook for the coming year. We remain committed to generating high returns for shareholders over time as a result of past investments and thedevelopments now in progress. Bob Lawson, Chairman 25 May 2005 BUSINESS REVIEW OPERATING PERFORMANCE Group At reported exchange rates, Group sales increased by 1.9% to £773.9m. Operating profit, before goodwill amortisationfell by 2.9% to £105.3m whilst profit before taxation and goodwill amortisation (PBT&G) fell by 2.5% to £104.4m.Earnings per share, before goodwill amortisation fell by 2.9% to 17.0p and after goodwill amortisation fell by 2.0%to 14.9p. Changes in exchange rates, particularly the US dollar, had an impact on the Group's reported sales and profits. Atconstant exchange rates, the sales growth would have been 4.0%, operating profit decline 1.7% and PBT&G decline1.2%. Exchange rate changes reduced the sales increase by £15.1m and increased the operating profit decline by£1.4m. The number of trading days also had an impact on sales growth: at constant exchange rates and adjusted fortrading days, the sales growth was 4.5%. Trading conditions worsened in the second half of the year with sales growth falling from 5.8% in the first half to3.3% in the second half. The operating profit increase of 15.5% in the first half reversed to a decline of 13.5% inthe second half, an overall decline of 1.7% for the year. The gross margin for the year was 53.2%, 0.6 percentage points below last year. This was due partly to the changingmix of businesses and partly to gross margin changes within the individual companies. Allied's sales grew fasterthan the rest of the Group, but at a lower margin (around 38%) which accounts for a third of the gross marginreduction. Gross margin increased in some businesses, notably in Continental Europe, but declined in others,particularly in the UK. Investment in selling and marketing was increased in most businesses and was £7.4m higher than last year. Theincrease was mainly in the sales forces. In addition, the redesign of the catalogue cost £1.6m. The EBS projects had a significant impact on costs and profits. The profit impact increased £3.1m from £6.1m to£9.2m. Process costs were £79.5m (10.3% of sales), compared to £77.6m last year (10.2% of sales). Pension costs increased by £2.6m during the year entirely in the UK schemes (of which £1.0m was in Processes and£1.6m was in the UK business). Operating margins declined from 14.3% last year to 13.6% as a result of the above factors. The interest charge of £0.9m was £0.5m lower than last year as the Group's Sterling deposits were higher than lastyear giving interest rate benefits. The tax rate of 29%, based on profit before tax and goodwill, was the same aslast year. Profit before tax and goodwill amortisation was £104.4m, down 1.2% on last year. Earnings per share before goodwillamortisation was 17.0p, down 2.9% on last year. In accordance with FRS 10, the goodwill that arose on the acquisition of Allied of £214.8m (at acquisition exchangerates) is being written off over 20 years. Taken together with the amortisation of goodwill on another smallhistorical acquisition, the total goodwill amortisation for the year was £9.4m (last year £10.2m). Profit before tax after goodwill amortisation was £95.0m and the effective tax rate on this profit was 31.9% to giveprofit for the year of £64.7m and earnings per share after goodwill amortisation was 14.9p, down 2.0% on last year. UK RS UK sales by origin grew by 0.6% to £358.8m. Trading conditions declined as the year progressed; growth of 2.3% inthe first half reversed to a decline of 1.0% in the second half. February and March were poor trading months and thebusiness exited the year declining at 4.5% year on year. This was mainly due to the Easter holidays occurring inMarch this year compared with April last year. The manufacturing sector remained weak during the year and employment in it continued to decline. Though more salesand marketing effort was directed to the service and public sectors, our sales mix by sector was unchanged on lastyear. We have again increased our investment in sales and marketing activities to increase our coverage of customers. Webelieve the larger sales force is having a positive effect: where sales engineers have been in territories forlongest and gained local experience, the sales performance is better. Our promotional activities continued and the"Britain's Hero at Work" 2004 campaign, part of the "Do Great Things" advertising initiative, achieved goodincreases in brand awareness. These activities helped maintain customer numbers during the year. A redesigned catalogue was launched in October which was well received by customers, although it remains too earlyto judge overall reaction. Over two million additional product data attributes have been included in the newcatalogue and products have been presented in ranges to increase comparability and hence ease the purchase decisionsof customers. In addition, the number of volumes was reduced from seven to five. The Spring edition of the cataloguehas been rescheduled from March to April so that the life of each catalogue issue remains 6 months. This rephasingalso impacted March sales and year end stock levels. Our network of 15 trade counters continued to perform strongly and had double-digit sales growth during the year.Trade counters continued to build enhanced services such as Managed Stock Replenishment (where RS manages thecustomers' stock at their sites supported by stock replenished from a local trade counter) with the number of MSRagreements growing by 18% over last year. An indication of the success of our approach to the market was RS winning the 'Distributor of the Year' at theEuropean Electronic Industry Awards. This was awarded for our success in identifying demand for new products and ourability to promote specific suppliers and technologies. e-Commerce continues to perform strongly and sales through this channel increased by 28.7% in the year. At the yearend sales via e-Commerce were 26% of sales, up from 20% at the end of last year. Wider use of e-Commerce will leadto some cost savings, as its proportion of the business increases. Order taking and customer enquiries are two areasof opportunity. Exports from the UK to third party distributors and direct to overseas customers showed strong growth during theyear, particularly in the Middle East. Gross margin declined on last year and the rate of decline was higher as the year progressed. The reasons for thedecline were selective price adjustments to improve value perceptions, higher discounts to larger customers, productmix (selling more high ticket price items) and increased cost prices (particularly from suppliers suffering fromcommodity price increases). Actions are being taken to mitigate these supplier pressures. The profit contribution fell £10.3m from £117.8m last year to £107.5m and the margin from 32.6% to 30.0%. The lowergross margin, higher selling and marketing costs, increased costs of EBS implementation and higher contributions tothe defined benefit pension scheme were all factors. Notwithstanding the profit reduction, the UK business continuesto be highly profitable and cash generative. Rest of Europe Rest of Europe sales grew by 2.5% to £243.5m, though the reported growth in Sterling was 1.0% reflecting the weakerEuro. Trading conditions worsened during the second half of the year, but overall growth rates remained steady. TheMarch exit sales growth rate fell to 0.3%, primarily due to the change in the timing of Easter. Sales in France declined slightly in the year. Sales were impacted in the first half by residual problems followingthe implementation of EBS in June 2003, but over the year these issues were resolved and customer service levelsimproved sufficiently to support a return to sales growth in the second half. Customer numbers remained steady.Sales and marketing efforts were intensified in the second half to capitalise on the improving customer sentiment.Our e-Commerce activities progressed well, particularly through further e-Procurement agreements and ourPurchasingManagerTM application. Sales in Germany grew in the year though at a lower rate in the second half. e-Commerce and targeted customers withgood growth potential drove the growth. The e-Procurement and particularly PurchasingManagerTM applications haveboth shown high growth in the number of installations and in the sales mix. During the year, the cut off time fororders received was extended to 10 p.m. for next day delivery, which illustrates the benefit of the Bad Hersfeldwarehouse location being close to the main carrier hubs. In Italy, sales grew at a higher rate than in Germany, but the pattern was similar. Customer numbers continued toincrease in both Germany and Italy. The smaller European operations had a good year. Austria, Benelux and Spain all achieved double digit sales growth.In Austria, a key driver of the growth was a significant increase in customer service, through improving productavailability. This was achieved by accessing the larger stockholding in Germany via overnight delivery servicedirectly from the Bad Hersfeld warehouse. e-Commerce continued to be successful across the region, achieving 22% of sales (up from 15% last year). In March,e-Commerce accounted for 24% of sales (up from 18% last year). The profit contribution increased 12.1% to £56.0m and margin increased from 21.2% to 23.0%, reflecting higheroverall gross margins. North America Allied's sales in North America grew by 19.4% to £112.8m during the year, although the reported growth in Sterlingwas 9.7%, reflecting the sharp weakening of the US Dollar. Sales growth slowed in the second half to 15.7% againstmore challenging comparatives. The exit rate of 13% was lower due to particularly strong sales in March last year. Allied's largely electronic and electromechanical product range was further expanded in the catalogue launched inOctober 2004 with around 25,000 new additions to give a net increase of 15,000 products. The 'Customer First'initiative launched last year continued to be rolled out successfully across the sales branches whilst thedeployment of more external salesmen was also positive. Allied continues to invest in improving service with therecent implementation of the Manugistics demand forecasting system used elsewhere in the Group, whilst the customerquotations system has also been upgraded. e-Commerce remains underdeveloped in Allied. Work on improving the website is continuing and it will be availableduring 2005/06. Better search functionality was introduced during the past year. A system to improve the processingof customer quotations is also being introduced. Gross margin remained stable at around 38%. The profit contribution increased 29.7% to £15.8m and the margin increased from 12.9% last year to 14.0%. Thisimprovement progressed during the year, with margins of 13.3% in the first half and 14.7% in the second. Japan Sales grew by 24.0% to £17.0m with continued growth in both customer numbers and the frequency with which customerspurchase. The reported growth in Sterling was 18.1%. Growth of 19.4% in the second half was lower than the 29.7%achieved in the first half of the year, whilst the exit rate of 15.9% in March was impacted by the lack of a Marchcatalogue and lower year end purchasing by customers. e-Commerce became the most important way to market in Japan by reaching 50% of sales in March (up from 43% lastyear). Sales through our PurchasingManagerTM and e-Procurement applications both grew well. Catalogue frequency has been reduced to once a year (from twice a year) supported by interim new product updates,following the positive experiences in France and Italy. The number of products has been increased from 47,000 to52,000 in the year. Profitability continued to improve during the year to give a profit contribution of £1.5m against break-even lastyear. Rest of World Sales in Rest of World grew by 9.1% to £41.8m, although the reported growth in Sterling was 4.5%. Trading conditionsvaried across the region with China particularly strong. Sales in China, including Hong Kong, grew by 17.5% whilst sales grew by 25.7% in mainland China and exited the yearat 44%. The same day offer (SDO) launched in Shanghai was extended into Beijing during the second half. SDO is basedon holding stock for sale in the Shanghai area to allow despatch on the day the order is received, so providing moreimmediate customer delivery. Its implementation has required the agreement of customs and VAT authorities to ensurethat the stock can be replenished and despatched quickly. New arrangements with local bankers also ensure thatpayments made by customers can be cleared flexibly. All of these relationships and permissions are privileges andtogether mean that we have a leading service position that is difficult for others to match. The high growth inChina and Hong Kong was complemented by good growth in the other businesses in Asia and Australasia. The implementation of EBS in Asia continues to progress: Hong Kong went live in May 2005 and will be followed nextyear by Shanghai. e-Commerce grew to 17% of sales in Asia in March (up from 11% last year). Growth was particularly good inAustralasia and Singapore. The profit contribution of £4.0m was the same as last year and the margin fell slightly from 10.0% to 9.6%. Profitsgrew in all businesses, except South Africa, where exchange rate fluctuations resulted in lower sales and a lowercontribution margin. Processes The Processes support our operating companies by ensuring that they have the products, infrastructure and expertiseto provide consistently high service levels around the world. Process costs during the year were £79.5m, up 2.4% from last year and amounting to 10.3% of sales. After adjustingfor the costs of EBS net of legacy savings, the catalogue transformation project and increased pensioncontributions, Process costs were 8.9% of sales (last year 9.5%). Information systems - Our high transaction volumes need to be processed accurately and consistently to achieve ourhigh level of total customer service. Robust information systems are therefore vital to the success of the businessand are a key resource in the Group. They are an area of significant cost and investment. Information Systems,including the costs of the EBS projects, accounted for just under half of total Process costs. A detailed review ofthe EBS projects is given below. Supply Chain - Our Supply Chain ensures that there is stock available to meet orders as they are received. Whilstcustomer service is our priority, efficient stock management is also critical. Many of the key performance measures used by the Group are customer service based and these have improvedparticularly in UK, France and Germany over the past year reflecting the investment in stock. Stock increased during the year by £13.6m, resulting in a lower turn (from 2.7x to 2.5x). The increase in stock toimprove customer service was one factor, but the planned rescheduling of the UK catalogue launch to April 2005 meansthat new product stock was on hand at the year end. These two factors accounted for around £8m of stock increase. In the US and Japan, stock levels have been kept in line with the growth of sales and this represents around £4m ofthe stock increase. Further investment was made in an increased number of products stocked in Shanghai, supporting the SDO project andits expansion into Beijing. This represents around £1m of the stock increase. Product Management - The Group offers around 350,000 distinct products to its worldwide customer base. Recently,considerable effort has been put into ensuring the coherence of our product ranges. Many more joint promotions with suppliers have been implemented, as suppliers recognise that we can be an importantpart of their sales and marketing effort. In light of new and more complex product regulations being introduced around the world, suppliers are much moreaware of the damage that can be done to their brands unless tight regulatory controls are maintained. We investconsiderable time and resources in making sure that we understand all of the compliance requirements in the marketswe serve, so that we can support both customers and suppliers securely. A particularly important development for everyone in the electronics industry is the Restriction of HazardousSubstances Directive (RoHS), which will take effect in July 2006. Whilst this is a European Union Directive, it isbecoming a de-facto world standard, being followed in Japan and certain states of the US, and so is affecting allour businesses. A team was formed during 2003, which has worked with industry experts, suppliers and customers todevelop our approach to all the implications of RoHS. A major programme was initiated to contact all suppliers of affected RoHS components and information and changes arenow being received at an accelerating rate. This is used to update our compliance records and the information isthen made available to customers via the RS web-sites and technical support teams. Suppliers are making theirproducts compliant at different rates and to differing degrees; for example, some suppliers plan to change theirproduct numbers and others do not. The Group is actively managing its existing stock to minimise the time taken tosell out of non-compliant products as this will help limit the need for additional RoHS-related stock and / or stockdisposals. As soon as the compliant products are made available by suppliers, they are being introduced into the RSrange. Programmes are in place to educate and inform customers, e.g. through customer seminars and support for theGovernment education programme in the UK, as well as the internet trading channel and technical support function. Media Publishing - The Media Publishing Process manages and delivers all the major media for the Group: whether theybe catalogues, 'specialogues', CD-ROMs or web sites. During the year, we have invested in a new catalogue publishing and content system. This was first used in theproduction of the October 2004 catalogue in the UK and cash costs were over £3m, of which around half has beenexpensed. The system allows the presentation of products in ranges rather than in the modular format previouslyused. Our research shows that this makes products easier to find and compare. The information held on the productsis also more extensive. As well as the additional information provided on products, the new system enables us toshow links to complementary products, to encourage pull-through sales. The next step is to structure the e-Commerce product database information into the same range-based format. When the effectiveness of the catalogue change is fully established, the intention is to roll out the new catalogueformat into other markets. Group Facilities - Group Facilities manages the development and effectiveness of the warehouses and office buildingsused by the Group. No significant investments took place during the year, although we continue to maintain andupgrade our current properties. The continued growth of Allied implies that additional warehouse capacity will beneeded in due course. FINANCIAL REVIEW AND CAPITAL STRUCTURE Cashflow and balance sheet Operating cash flow was £117.4m, down from £134.8m last year. Cash conversion remained high at 111.5% of operatingprofit before goodwill amortisation (last year 124.2%). The increased working capital outflow was the main reasonfor the decline. Working capital outflows amounted to £10.2m, compared to an inflow of £3.5m last year. This was mainly due to higherstock and the timing of pension payments. The extra stock was built to support sales and customer services asdescribed above. The cash outflow from creditors was £2.8m, mainly due to payment of additional prior year pensioncontributions. Trade creditor days were similar to last year at 43.5 (43.9 last year). Debtors decreased by £6.2mand so trade debtor days were 50.9 compared with 52.8 last year: Easter had a beneficial impact on debtors at theend of March, but will reverse in the coming year. Free cash flow fell by 26.4% to £61.1m again reflecting the working capital outflow but also higher capitalexpenditure. Net capital expenditure was £23.8m, up from £19.2m last year, when a property was sold for its net bookvalue of £3.1m. Of this capital expenditure £13.0m was on EBS projects, up from £10.2m last year. Gross capitalexpenditure as a multiple of depreciation was 1.1x, slightly above the 1.0x last year. Interest and tax paymentsamounted to £32.5m, which were similar to last year. EBS had a much larger impact on cash flow in the year than inprevious years, as described below. The cash outflow on dividends was £80.0m, up 6.1% from £75.4m last year. Exchange rate movements increased net debtby £2.0m to give an overall increase in net debt of £20.9m to £55.4m. Gearing increased to 16.8% from 10.0% last year but interest cover (before goodwill amortisation) increased to 117xfrom 77x last year due to the fall in interest charge this year. Exchange rate changes had less overall impact on the balance sheet than last year: exchange rate translationincreased net assets by £1.6m compared to a reduction of £29.2m last year. Capital structure Net debt of £55.4m at the year end was made up of gross debt of £120.2m (denominated £62.3m in US Dollars, £33.6m inYen and £24.3m in other currencies) and financial assets of £64.8m (denominated £17.5m in Euro, £44.6m in Sterlingand £2.7m in other currencies). These dispositions are based on interest rate differentials and tax efficiency.Borrowing requirements through the year are significantly determined by dividend and tax payments. The peakborrowing last year was £98.6m. The Group's two main sources of debt are a bilateral facility for $100m maturing in February 2008 and a syndicatedfacility for $75m and £110m from eight banks maturing in February 2010. These facilities were put into place inFebruary 2005 to replace, at a lower margin, all the previous facilities. Financial returns Profit before tax and goodwill on net assets was 31.6%, up from 31.1% last year. These returns remain significantlyhigher than the Group's cost of capital. e-COMMERCE e-Commerce will be a critical part of our future strategy. e-Commerce has been an area of rapid growth since 1998when the first website was launched (rswww.com) in the UK. e-Commerce sales were 20% of total sales for the year, upfrom 15% last year, and exited the year at 22%, up from 17% last year: e-Commerce sales of £155.9m were 38% higherthan last year. Our e-Commerce activities are based on a common platform. It comprises three channels: the internet website, whichsupports sales via 70 websites in 17 languages, PurchasingManagerTM; and e-Procurement. Sales through websites stillmake up the majority of e-Commerce sales. e-Procurement and PurchasingManagerTM both enable customers to monitor andcontrol purchases more carefully and functions such as online order approval help to lower the customers'transaction costs. PurchasingManagerTM is our customised front end to the website, which is provided free to ourcustomers. e-Procurement utilises the customers' own e-procurement system, which can punch out to the RS website. PurchasingManagerTM continues to be particularly successful and is now used by more than 4,000 customer accounts in12 countries (last year, 800 accounts in 10 countries). Revenues through this channel are now close to that of thee-Procurement stream, reflecting the ease of using PurchasingManagerTM whilst also demonstrating the challenge thatcustomers have of using integrated e-procurement systems. Internet functionality has continued to improve during the year with new parcel tracking and easier order inputfacilities. New marketing approaches such as search engine promotion and bulk email broadcasting are becoming an important partof our activities, and are used to increase marketing pressure and awareness. ENTERPRISE BUSINESS SYSTEM PROJECTS Objectives and progress The Enterprise Business System projects are complex multi-year change management projects, the objective of which isto improve significantly our service to customers, increase the effectiveness and efficiency of our businessesoperations and to make our systems infrastructure more robust and secure. This will result from implementing morestandardised and integrated systems and data structures across the businesses. The projects are a critical enablerof the evolving Group strategy and are a key means of achieving greater flexibility and lower costs. The next implementation of the European template is in the UK, including the central logistics and Processactivities. The plan is for the UK go-live to take place towards the end of 2005/06, but at this stage it is notpossible to be absolutely precise on timing. The implementation will take place when the system and the business areready and the quality standard applied to the go-live decision will be very high. Contingency plans are also beingdeveloped and tested in detail. Additional stock will be carried to support customer service for a period before andafter the UK go-live whilst there is also additional capital investment in systems capacity and infrastructure inthe coming year to ensure robust system performance. After the UK, the next roll out will be in Germany, where some long lead-time preparation has been done, Italy andthen the smaller businesses. The roll out should be completed over the next four years, by 2008/09. A similar but smaller EBS project is underway in Asia, with implementations completed in Singapore, Malaysia,Philippines, Australia and most recently (May 2005) in Hong Kong. The next roll out will be to Shanghai. In due course there will be a systems investment required in Allied, though on a much smaller scale than EBS inEurope. Costs and cash flows The EBS projects have had a substantial impact on the financial performance of the Group in terms of profit and cashflow over the past five years. This impact is expected to peak in 2005/06 with the UK implementation. The capital items of the projects include the hardware and software licenses. The capitalised costs also include thecosts of designing, building and testing the applications whether by third party consultants or through internallabour. Depreciation of the capitalised amounts reflects specified rates for the different components depending ontheir estimated life. The range of the lives is two years to eight years and the initiation of depreciation is whenthe asset first comes into use. Hence, given the magnitude of the UK and central logistics go-live, there will be asubstantial increase in annual depreciation at this go-live. Depreciation is included in Process costs. The net bookvalue (or carrying value) of capitalised costs is reviewed for impairment periodically. The expensed project costs relate to training and business change, together with any inefficiencies in otherwisecapitalisable costs. In effect, these are the costs of preparing the system for the business and are included inProcess costs. The expensed project costs increase sharply as the projects move into their later phases. Costs that are incurred by the business to cover the costs of training (such as taking on additional sales staff toensure that training does not impact current customer service) and change management are expensed and shown as localcosts. The EBS applications require maintenance and support, including help desk activities. These costs are expensed aspart of Process costs, but are offset by savings of such costs on the legacy systems. In the current year, EBS has impacted profit by about £9.2m and cash flow by £16.6m (both net of displaced legacycosts of £4.9m), which are a substantial increase on last year, where the impacts on profit and cash flow were £6.1mand £12.4m respectively. Over the last five years, the cash outflow on the project of about £71.6m has largely beenon capital expenditure, which amounted to £63.2m. The costs to complete the EBS projects require many assumptions on the success in meeting milestones and hence theimplementation timing. Based on current plans, the UK and central logistics implementation is expected to drive alarge increase in costs and cash outflow in 2005/06, approximately doubling the profit and cash flow impacts from2004/05. The local costs and Process costs will both increase sharply given the intensified training schedule,whilst the depreciation impact will reflect the detailed timing of go-live. The working capital outflow on supportstock is now expected to be around £11m. This will be run down in 2006/07. Capital expenditure is expected to be higher in 2005/06 than previously planned, due to greater consultancy resourcerequired in the build and testing phases and also due to more investment in equipment capacity. Also, third partyhosting will be introduced for the major hardware components of EBS and other major Group systems to increasesecurity and resilience. The incidence of costs, stock build and capital expenditure in the coming year are expected to be concentrated inthe first half which will significantly depress the overall free cash flow of the Group in this period. In 2006/07, the operating profit impact is likely to be similar to 2005/06, with the reduction in local and expensedproject costs being offset by higher (annualised) depreciation. The cash outflow is expected to be much lower thanin 2005/06, due to lower costs, the release of the safety stock and lower capital expenditure. The implementations in Germany, Italy and elsewhere in Europe will be roll outs of the existing template withlimited modification and so project costs and the cash flow impact reduce shortly after 2006/07. Given the current assumptions, the overall cash costs (capital and expense) of the EBS projects are expected to bearound £110m-£120m through to 2008/09 from 2000/01, before interest and tax and before any benefits other thanlegacy cost savings. Of this, around 90% relates to Europe, the rest to Asia. The operating profit impact is around£80m over the 8 years of the project. Benefits The major benefits of the EBS projects are the qualitative ones that derive from having more standardised andintegrated operating systems, procedures and data structures. The realisation of further competitive advantagethrough enhanced customer service and capability is key. Specific measurable benefits will only become visible after the UK and common logistics go-live and stabilisationand a change of this magnitude will require some settling in during 2006/07. Stock efficiencies are expected toimprove significantly as stock can be managed with a regional database as against the current country levelinformation. Operating structures with improved efficiencies, such as from shared services, will be driven fromcommon procedures and data. Customer and supplier support and capabilities should be significantly enhanced,including more rapid and focused product introductions. Over the project life, we believe the benefits of theprojects should broadly cover the cash investment. PENSION The Group has defined benefit schemes in the UK (closed to new entrants in April 2003 and replaced by a new definedcontribution scheme), Ireland (closed to new entrants) and Germany. Elsewhere, including the replacement UK scheme,the schemes are defined contribution. SSAP 24 remains the accounting standard applied to pensions. A triennial valuation of the UK defined benefit schemewas carried out as at 31 March 2004 and completed during the year. It showed a deficit of £33.4m, net of deferredtax of £14.3m. In order to eliminate the deficit, based on the assumptions used in the valuation, the Group ismaking annual payments to the scheme for the next 15 years of £4.3m (increasing at 3% per year). Last year, anincreased charge of £1.8m was taken. The total charge for defined benefit schemes increased by £2.4m to £8.5m. From 1 April 2005, employee contributionsto the scheme have also increased. The UK defined contribution scheme incurred a charge of £0.4m, an increase of£0.2m over last year. The statutory minimum funding position of the UK defined benefit scheme remains relatively strong with a MinimumFunding Ratio of 135%-140% as at 31 March 2005 (last year 125%-130%). FRS 17 was due to replace SSAP 24 in 2005 but has not been implemented due to the deferral by the AccountingStandards Board. The Group will move to IAS 19 next year, which should be similar in application to FRS 17, pendingthe approval of the recent amendment by the International Accounting Standards Board. Under FRS 17, the definedbenefit schemes showed a combined deficit of £32.4m, net of deferred tax, compared to a deficit of £34.6m at the endof last year. The charge to profits arising from these schemes would have been £10.6m (last year £10.4m). INTERNATIONAL FINANCIAL REPORTING STANDARDS The Group will report using International Financial Reporting Standards for the year ending 31 March 2006. The nextset of interim financial statements, for the six months ending 30 September 2005, will consequently also be preparedusing these standards. A project team has been working for 18 months to estimate the extent of the changes to the Group results. The mainchanges for the Group include accounting for defined benefit pension schemes, share option plans, dividends andgoodwill. The changes to reported profit will also change the presentation of earnings per share. We plan to make a separate announcement on the extent of changes arising from the conversion to InternationalFinancial Reporting Standards in July 2005. Consolidated Profit and Loss Account For the year ended 31 March 2005 2005 2004 (as restated) Note £m £m__________________________________________________________________________________________________________________Turnover 1 773.9 759.3Cost of sales (361.8) (350.9)__________________________________________________________________________________________________________________Gross profit 412.1 408.4Distribution and marketing expenses (298.8) (290.9)Administrative expenses- Before amortisation of goodwill (8.0) (9.0)- Amortisation of goodwill (9.4) (10.2)__________________________________________________________________________________________________________________ (17.4) (19.2)__________________________________________________________________________________________________________________Operating profit- Before amortisation of goodwill 105.3 108.5- Amortisation of goodwill (9.4) (10.2)__________________________________________________________________________________________________________________ 95.9 98.3__________________________________________________________________________________________________________________Net interest payable (0.9) (1.4)__________________________________________________________________________________________________________________Profit on ordinary activities before taxation 1 95.0 96.9Profit before taxation and amortisation of goodwill 104.4 107.1__________________________________________________________________________________________________________________Taxation on profit on ordinary activities 2 (30.3) (31.0)Profit on ordinary activities after taxation 7 64.7 65.9Dividend (80.0) (79.1)__________________________________________________________________________________________________________________Retained loss for the financial year (15.3) (13.2)__________________________________________________________________________________________________________________Earnings per shareBasic 3 • Before amortisation of goodwill 17.0p 17.5p • After amortisation of goodwill 14.9p 15.2p __________________________________________________________________________________________________________________Dividend per share • Interim (paid) 5.8p 5.6p • Final (proposed) 4 12.6p 12.6p __________________________________________________________________________________________________________________ 18.4p 18.2p__________________________________________________________________________________________________________________ Consolidated Statement of Total Recognised Gains and Losses for the year ended 31 March 2005__________________________________________________________________________________________________________________Profit for the financial year 64.7 65.9Translation differences 1.6 (29.2)__________________________________________________________________________________________________________________Total recognised gains and losses relating to the year 66.3 36.7__________________________________________________________________________________________________________________Prior year adjustment: implementation of UITF 38 11 (1.3)__________________________________________________________________________________________________________________Total recognised gains and losses since last annual 65.0report__________________________________________________________________________________________________________________ All profits and losses are stated at historical cost. The reconciliation of movements in shareholders' funds is in note 7. Consolidated Balance Sheet As at 31 March 2005 2005 2004 (as restated) Note £m £m__________________________________________________________________________________________________________________Fixed assetsIntangible fixed assets 129.6 141.8Tangible fixed assets 6 165.8 163.3Investments 0.2 0.1__________________________________________________________________________________________________________________ 295.6 305.2__________________________________________________________________________________________________________________Current assetsStocks 142.3 128.7Debtors 152.4 151.6Investments 53.6 65.4Cash at bank and in hand 11.2 7.9__________________________________________________________________________________________________________________ 359.5 353.6Creditors: amounts falling due within one year (207.0) (210.0)Net current assets 152.5 143.6__________________________________________________________________________________________________________________Total assets less current liabilities 448.1 448.8Creditors: amounts falling due after more than one year (103.1) (92.8)Provisions for liabilities and charges (14.3) (11.6)__________________________________________________________________________________________________________________ 330.7 344.4__________________________________________________________________________________________________________________Capital and reservesCalled-up share capital 43.5 43.5Share premium account 38.4 38.4Retained earnings 248.8 262.5__________________________________________________________________________________________________________________Equity shareholders' funds 7 330.7 344.4__________________________________________________________________________________________________________________ Consolidated Cash Flow Statement For the year ended 31 March 2005 2005 2004 (as restated) Note £m £m__________________________________________________________________________________________________________________Reconciliation of operating profit to net cash inflow fromoperating activitiesOperating profit 95.9 98.3Amortisation of goodwill 9.4 10.2Depreciation and other amortisation 22.3 22.8(Increase) decrease in stocks (13.6) 1.0Decrease (increase) in debtors 6.2 (8.4)(Decrease) increase in creditors (2.8) 10.9__________________________________________________________________________________________________________________Net cash inflow from operating activities 117.4 134.8__________________________________________________________________________________________________________________ CASH FLOW STATEMENTNet cash inflow from operating activities 117.4 134.8Returns on investments and servicing of finance (1.3) (1.3)Taxation (31.2) (31.3)Capital expenditure 9 (23.8) (19.2)__________________________________________________________________________________________________________________