- Description and history
- Group structure and developments
- Markets and competition
- Strengths and resources
- Strategy
- Operating performance
- Financial review and capital structure
- e-Commerce
- Enterprise Business System projects
- Pension
- Risks
- Corporate and Social Responsibility
- International Financial Reporting Standards
Operating performance
Group
| 2005 | 2004 (as restated) |
|
| Sales | £773.9m | £759.3m |
| Operating profit* | £105.3m | £108.5m |
| Operating profit | £95.9m | £98.3m |
| Interest | (£0.9m) | (£1.4m) |
| Profit before tax* | £104.4m | £107.1m |
| Profit before tax | £95.0m | £96.9m |
| Earnings per share* | 17.0p | 17.5p |
| Earnings per share | 14.9p | 15.2p |
| Dividend per share | 18.4p | 18.2p |
Key statistics
| 2005 | 2004 (as restated) |
|
| Gross margin % | 53.2% | 53.8% |
| Operating return on sales %* | 13.6% | 14.3% |
| Effective tax rate %* | 29.0% | 28.9% |
| PBT on net assets %* | 31.6% | 31.1% |
* Before goodwill amortisation
At reported exchange rates, Group sales increased by 1.9% to £773.9m. Operating profit, before goodwill amortisation, fell 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. At constant exchange rates, the sales growth would have been 4.0%; operating profit decline 1.7% and PBT&G decline 1.2%. 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 for trading 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 to 3.3% in the second half. The operating profit increase of 15.5% in the first half reversed to a decline of 13.5% in the 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 changing mix of businesses and partly to gross margin changes within the individual companies. Allied’s sales grew faster than the rest of the Group, but at a lower margin (around 38%) which accounts for a third of the gross margin reduction. 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. The increase was mainly in sales forces, the catalogue and direct marketing. 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, as detailed in the Enterprise Business System projects section of this review.
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 last year giving interest rate benefits. The tax rate of 29%, based on profit before tax and goodwill, was the same as last year.
Profit before tax and goodwill amortisation was £104.4m, down 1.2% on last year. Earnings per share before goodwill amortisation 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 exchange rates) is being written off over 20 years. Taken together with the amortisation of goodwill on another small historical 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 give profit for the year of £64.7m and earnings per share after goodwill amortisation was 14.9p, down 2.0% on last year.
UK
| 2005 | 2004 | |
| Sales (by destination) | £345.2m | £348.2m |
| Adjusted sales growth | 0.3% | (0.8%) |
| Sales (by origin) | £358.8m | £361.0m |
| Adjusted sales growth | 0.6% | (0.9%) |
| Contribution | £107.5m | £117.8m |
| Contribution % | 30.0% | 32.6% |
RS UK sales by origin grew by 0.6% to £358.8m. Trading conditions declined as the year progressed: growth of 2.3% in the first half reversed to a decline of 1.0% in the second half. February and March were poor trading months and the business exited the year declining at 4.5% year on year. This was mainly due to the Easter holidays occurring in March this year compared with April last year.
The manufacturing sector remained weak during the year and employment in it continued to decline. Though more sales and marketing effort was directed to the service and public sectors, our sales mix by sector was unchanged on last year.
We have again increased our investment in sales and marketing activities to increase our coverage of customers. We believe the larger sales force is having a positive effect: where sales engineers have been in territories for longest 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 good increases 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 early to judge overall reaction. Over two million additional product data attributes have been included in the new catalogue and products have been presented in ranges to increase comparability and hence ease the purchase decisions of customers. In addition, the number of volumes was reduced from seven to five. The Spring edition of the catalogue has been rescheduled from March to April so that the life of each catalogue issue remains 6 months. This rephasing also 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 the customers’ stock at their sites supported by stock replenished from a local trade counter) with the number of MSR agreements 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 the European Electronic Industry Awards. This was awarded for our success in identifying demand for new products and our ability 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 year end sales via e-Commerce were 26% of sales, up from 20% at the end of last year. Wider use of e-Commerce will lead to some cost savings, as its proportion of the business increases. Order taking and customer enquiries are two areas of opportunity.
Exports from the UK to third party distributors and direct to overseas customers showed strong growth during the year, 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 the decline were selective price adjustments to improve value perceptions, higher discounts to larger customers, product mix (selling more high ticket price items) and increased cost prices (particularly from suppliers suffering from commodity 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 lower gross margin, higher selling and marketing costs, increased costs of EBS implementation and higher contributions to the defined benefit pension scheme were all factors. Notwithstanding the profit reduction, the UK business continues to be highly profitable and cash generative.
Rest of Europe
| 2005 | 2004 | |
| Sales | £243.5m | £241.1m |
| Adjusted sales growth | 2.5% | (1.4%) |
| Contribution | £56.0m | £51.0m |
| Contribution % | 23.0% | 21.2% |
Rest of Europe sales grew by 2.5% to £243.5m, though the reported growth in Sterling was 1.0% reflecting the weaker Euro. Trading conditions worsened during the second half of the year, but overall growth rates remained steady. The March 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 following the implementation of EBS in June 2003, but over the year these issues were resolved and customer service levels improved 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 our PurchasingManager™ application.
Sales in Germany grew in the year though at a lower rate in the second half. e-Commerce and targeted customers with good growth potential drove the growth. The e-Procurement and particularly PurchasingManager™ applications have both shown high growth in the number of installations and in the sales mix. During the year, the cut-off time for orders received was extended to 10 p.m. for next day delivery, which illustrates the benefit of the Bad Hersfeld warehouse 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 to increase 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 product availability. This was achieved by accessing the larger stockholding in Germany via overnight delivery service directly 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 higher overall gross margins.
North America
| 2005 | 2004 | |
| Sales | £112.8m | £102.8m |
| Adjusted sales growth | 19.4% | 9.7% |
| Contribution | £15.8m | £13.3m |
| Contribution % | 14.0% | 12.9% |
Allied’s sales in North America grew by 19.4% to £112.8m during the year, although the reported growth in Sterling was 9.7%, reflecting the sharp weakening of the US Dollar. Sales growth slowed in the second half to 15.7% against more 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 in October 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 the deployment of more external salesmen was also positive. Allied continues to invest in improving service with the recent implementation of the Manugistics demand forecasting system used elsewhere in the Group, whilst the customer quotations system has also been upgraded.
e-Commerce remains underdeveloped in Allied. Work on improving the website is continuing and it will be available during 2005/06. Better search functionality was introduced during the past year. A system to improve the processing of 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%. This improvement progressed during the year, with margins of 13.3% in the first half and 14.7% in the second.
Japan
| 2005 | 2004 | |
| Sales | £17.0m | £14.4m |
| Adjusted sales growth | 24.0% | 28.4% |
| Contribution | £1.5m | £0.0m |
| Contribution % | 8.8% | N/A |
Sales grew by 24.0% to £17.0m with continued growth in both customer numbers and the frequency with which customers purchase. 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 March catalogue 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% last year). Sales through our PurchasingManager™ 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 to 52,000 in the year.
Profitability continued to improve during the year to give a profit contribution of £1.5m against break-even last year.
Rest of the World
| 2005 | 2004 | |
| Sales | £41.8m | £40.0m |
| Adjusted sales growth | 9.1% | 2.8% |
| Contribution | £4.0m | £4.0m |
| Contribution % | 9.6% | 10.0% |
Sales in Rest of World grew by 9.1% to £41.8m, although the reported growth in Sterling was 4.5%. Trading conditions varied across the region with China particularly strong.
Sales in China, including Hong Kong, grew by 17.5% whilst growth reached 25.7% in mainland China and exited the year at 44%. The same day offer (SDO) launched in Shanghai was extended into Beijing during the second half. SDO is based on holding stock for sale in the Shanghai area to allow despatch on the day the order is received, so providing more immediate customer delivery. Its implementation has required the agreement of customs and VAT authorities to ensure that the stock can be replenished and despatched quickly. New arrangements with local bankers also ensure that payments made by customers can be cleared flexibly. All of these relationships and permissions are privileges and together mean that we have a leading service position that is difficult for others to match. The high growth in China 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 next year by Shanghai.
e-Commerce grew to 17% of sales in Asia in March (up from 11% last year). Growth was particularly good in Australasia 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%. Profits grew in all businesses, except South Africa, where exchange rate fluctuations resulted in lower sales and a lower contribution margin.
Processes
2005 |
2004 |
|
| Total cost | £79.5m | £77.6m |
| Cost as a % of sales | 10.3% | 10.2% |
The Processes support our operating companies by ensuring that they have the products, infrastructure and expertise to 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 adjusting for the costs of EBS net of legacy savings, the catalogue transformation project and increased pension contributions, 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 our high level of total customer service. Robust information systems are therefore vital to the success of the business and 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 of the EBS projects is given in the Enterprise Business System projects section of this Report.
Supply Chain Our Supply Chain ensures that there is stock available to meet orders as they are received. Whilst customer 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 improved particularly in the 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 to improve customer service was one factor, but the planned rescheduling of the UK catalogue launch to April 2005 means that 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 of the stock increase.
Further investment was made in an increased number of products stocked in Shanghai, supporting the SDO project and its 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 important part of their sales and marketing effort.
In light of new and more complex product regulations being introduced around the world, suppliers are much more aware of the damage that can be done to their brands unless tight regulatory controls are maintained. We invest considerable time and resources in making sure that we understand all of the compliance requirements in the markets we 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 Hazardous Substances Directive (RoHS), which will take effect in July 2006. Whilst this is a European Union Directive, it is becoming a defacto world standard, being followed in Japan and certain states of the US, and so is affecting all our businesses. A team was formed during 2003, which has worked with industry experts, suppliers and customers to develop 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 are now being received at an accelerating rate. This is used to update our compliance records and the information is then made available to customers via the RS websites and technical support teams. Suppliers are making their products compliant at different rates and to differing degrees; for example, some suppliers plan to change their product numbers and others do not. The Group is actively managing its existing stock to minimise the time taken to sell out of non-compliant products as this will help limit the need for additional RoHS-related stock and/or stock disposals. As soon as the compliant products are made available by suppliers, they are being introduced into the RS range. Programmes are in place to educate and inform customers, e.g. through customer seminars and support for the Government 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 they be catalogues, “specialogues”, CD-ROMs or websites.
During the year, we have invested in a new catalogue publishing and content system. This was first used in the production of the October 2004 catalogue in the UK and cash costs were over £3m, of which around half has been expensed. The system allows the presentation of products in ranges rather than in the modular format previously used. Our research shows that this makes products easier to find and compare. The information held on the products is also more extensive. As well as the additional information provided on products, the new system enables us to show 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 catalogue format into other markets.
Group Facilities Group Facilities manages the development and effectiveness of the warehouses and office buildings used by the Group. No significant investments took place during the year, although we continue to maintain and upgrade our current properties. The continued growth of Allied implies that additional warehouse capacity will be needed in due course.
