- 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
Financial review and capital structure
Cash flow and balance sheet
| 2005 | 2004 | |
| (Inc) dec in stocks | (13.6m) | £1.0m |
| Dec (inc) in debtors | £6.2m | (£8.4m) |
| (Dec) inc in creditors | (£2.8m) | £10.9m |
| Working capital | (£10.2m) | £3.5m |
| Operating cash flow | £117.4m | £134.8m |
| Capital expenditure (net) | (£23.8m) | (£19.2m) |
| Free cash flow | £61.1m | £83.0m |
| Net debt | (£55.4m) | (£34.5m) |
Key working capital statistics
| 2005 | 2004 | |
| Stock turn | 2.5x | 2.7x |
| Trade debtor days | 50.9 | 52.8 |
| Trade creditor days | 43.5 | 43.9 |
Operating cash flow was £117.4m, down from £134.8m last year. Cash conversion remained high at 111.5% of operating profit before goodwill amortisation (last year 124.2%). The increased working capital outflow was the main reason for the decline.
Working capital outflows amounted to £10.2m, compared to an inflow of £3.5m last year. This was mainly due to higher stock and the timing of pension payments. The extra stock was built to support sales and customer services as described above. The cash outflow from creditors was £2.8m, mainly due to payment of additional prior year pension contributions. Trade creditor days were similar to last year at 43.5 (43.9 last year). Debtors decreased by £6.2m and so trade debtor days were 50.9 compared with 52.8 last year: Easter had a beneficial impact on debtors at the end 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 capital expenditure. Net capital expenditure was £23.8m, up from £19.2m last year, when a property was sold for its net book value of £3.1m. Of this capital expenditure, £13.0m was on EBS projects, up from £10.2m last year. Gross capital expenditure as a multiple of depreciation was 1.1x, slightly above the 1.0x last year. Interest and tax payments amounted to £32.5m, which were similar to last year. EBS had a much larger impact on cash flow in the year than in previous years, as described in the Enterprise Business System projects section.
The cash outflow on dividends was £80.0m, up 6.1% from £75.4m last year. Exchange rate movements increased net debt by £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 117x from 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 translation increased 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 in Yen and £24.3m in other currencies) and financial assets of £64.8m (denominated £17.5m in Euro, £44.6m in Sterling and £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 peak borrowing 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 syndicated facility for $75m and £110m from eight banks maturing in February 2010. These facilities were put into place in February 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 significantly higher than the Group’s cost of capital.
e-Commerce will be a critical part of our future strategy. e-Commerce has been an area of rapid growth since 1998 when the first website was launched (rswww.com) in the UK. e-Commerce sales were 20% of total sales for the year, up from 15% last year, and exited the year at 22%, up from 17% last year: e-Commerce sales of £155.9m were 38% higher than last year.
Our e-Commerce activities are based on a common platform. It comprises three channels: the internet website, which supports sales via 70 websites in 17 languages, PurchasingManager™; and e-Procurement. Sales through websites still make up the majority of e-Commerce sales. e-Procurement and PurchasingManager™ both enable customers to monitor and control purchases more carefully and functions such as online order approval help to lower the customers’ transaction costs. PurchasingManager™ is our customised front end to the website, which is provided free to our customers. e-Procurement utilises the customers’ own e-procurement system, which can punch out to the RS website. PurchasingManager™ continues to be particularly successful and is now used by more than 4,000 customer accounts in 12 countries (last year, 800 accounts in 10 countries). Revenues through this channel are now close to that of the e-Procurement stream, reflecting the ease of using PurchasingManager™ whilst also demonstrating the challenge that customers have of using integrated e-procurement systems.
Internet functionality has continued to improve during the year with new parcel tracking and easier order input facilities.
New marketing approaches such as search engine promotion and bulk e-mail broadcasting are becoming an important part of 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 is to improve significantly our service to customers, increase the effectiveness and efficiency of our businesses’ operations and to make our systems infrastructure more robust and secure. This will result from implementing more standardised and integrated systems and data structures across the businesses. The projects are a critical enabler of 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 Process activities. The plan is for the UK go-live to take place towards the end of 2005/06, but at this stage it is not possible to be absolutely precise on timing. The implementation will take place when the system and the business are ready and the quality standard applied to the go-live decision will be very high. Contingency plans are also being developed and tested in detail. Additional stock will be carried to support customer service for a period before and after the UK go-live whilst there is also additional capital investment in systems capacity and infrastructure in the 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 and then the smaller businesses. The roll out should be completed over the next four years, by 2008/09.
A similar but smaller EBS project is under way in Asia, with implementations completed in Singapore, Malaysia, the Philippines, Australia and most recently (May 2005) in Hong Kong. The next roll out will be in Shanghai.
In due course there will be a systems investment required in Allied, though on a much smaller scale than EBS in Europe.
Costs and cash flows
The EBS projects have had a substantial impact on the financial performance of the Group in terms of profit and cash flow 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 the costs of designing, building and testing the applications whether by third party consultants or through internal labour. Depreciation of the capitalised amounts reflects specified rates for the different components depending on their estimated life. The range of the lives is two years to eight years and the initiation of depreciation is when the asset first comes into use. Hence, given the magnitude of the UK and central logistics go-live, there will be a substantial increase in annual depreciation at this go-live. Depreciation is included in Process costs. The net book value (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 otherwise capitalisable costs. In effect, these are the costs of preparing the system for the business and are included in Process 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 to ensure that training does not impact current customer service) and change management are expensed and shown as local costs.
The EBS applications require maintenance and support, including help desk activities. These costs are expensed as part 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 legacy costs of £4.9m), which are a substantial increase on last year, where the impacts on profit and cash flow were £6.1m and £12.4m respectively. Over the last five years, the cash outflow on the project of about £71.6m has largely been on 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 the implementation timing. Based on current plans, the UK and central logistics implementation is expected to drive a large increase in costs and cash outflow in 2005/06, approximately doubling the profit and cash flow impacts from 2004/05. 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 support stock 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 resource required in the build and testing phases and also due to more investment in equipment capacity. Also, third party hosting will be introduced for the major hardware components of EBS and other major Group systems to increase security and resilience.
The incidence of costs, stock build and capital expenditure in the coming year are expected to be concentrated in the 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 expensed project costs being offset by higher (annualised) depreciation. The cash outflow is expected to be much lower than in 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 with limited 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 be around £110m-£120m through to 2008/09 from 2000/01, before interest and tax and before any benefits other than legacy cost savings. Of this, around 90% relates to Europe, the rest to Asia. The operating profit impact is around £80m over the eight years of the project.
The financial impact (before interest and tax) of EBS through to 31 March 2005 is:
| Cum 2003 £m | 2003/04 £m | 2004/05 £m | Cum 2005 £m | |
| Local costs | 0.3 | 1.1 | 1.7 | 3.1 |
| Process costs | ||||
| Project costs | 4.4 | 2.0 | 1.8 | 8.2 |
| System support | 1.1 | 3.3 | 5.0 | 9.4 |
| Depreciation | 1.7 | 3.9 | 5.6 | 11.2 |
| Displaced legacy costs | (3.2) | (4.2) | (4.9) | (12.3) |
| Profit and loss account impact | 4.3 | 6.1 | 9.2 | 19.6 |
| Add back depreciation | (1.7) | (3.9) | (5.6) | (11.2) |
| Capital expenditure | 40.0 | 10.2 | 13.0 | 63.2 |
| Cash flow impact before interest and tax | 42.6 | 12.4 | 16.6 | 71.6 |
Benefits
The major benefits of the EBS projects are the qualitative ones that derive from having more standardised and integrated operating systems, procedures and data structures. The realisation of further competitive advantage through enhanced customer service and capability is key.
Specific measurable benefits will only become visible after the UK and common logistics go-live and stabilisation and a change of this magnitude will require some settling in during 2006/07. Stock efficiencies are expected to improve significantly as stock can be managed with a regional database as against the current country level information. Operating structures with improved efficiencies, such as from shared services, will be driven from common 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 the projects should broadly cover the cash investment.
