Electrocomponents plc Annual Report and Accounts for the year ended 31 March 2019 Electrocomponents plc Annual Report and Accounts for the year ended 31 March 2019 MAKE MORE POSSIBLE Annual Report and Accounts for the year ended 31 March 2019 Electrocomponents plc 3 WE ARE A GLOBAL MULTI-CHANNEL PROVIDER OF INDUSTRIAL AND ELECTRONIC PRODUCTS AND SOLUTIONS Front cover “ We are here The image on the front cover represents Hyperloop, a futuristic to inspire transport system. RS Components is a major sponsor of the University and support of Edinburgh’s team, HYPED, in the 2019 SpaceX Hyperloop Pod innovative Competition to revolutionise engineering so terrestrial transportation. we can make more possible.” LINDSLEY RUTH CHIEF EXECUTIVE OFFICER Further information can be found at electrocomponents.com STRATEGIC REPORT CORPORATE GOVERNANCE FINANCIAL FINANCIAL STATEMENTS SHAREHOLDER HIGHLIGHTS INFORMATION Revenue Like-for-like1 revenue growth £1,884.4m 8.3% Growth 10.5% 2018: 12.8% 2018: £1,705.3m Profit before tax Adjusted2 profit before tax £195.2m £214.5m Growth 15.8% Like-for-like1 growth 20.8% 2018: £168.6m 2018: £173.1m Earnings per share Adjusted2 earnings per share 33.4p 37.0p Growth (1.5)% Like-for-like1 growth 26.8% 2018: 33.9p 2018: 28.4p Dividend per share Adjusted2 free cash flow 14.8p £84.5m Growth 11.7% Growth (19.6)% 2018: 13.25p 2018: £105.1m 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 2018 converted at 2019 average exchange rates. Revenue is also adjusted to eliminate the impact of trading days year on year. 2. Adjusted excludes amortisation of intangible assets arising on acquisition of businesses, substantial reorganisation costs, asset write-downs, one-off pension credits or costs, significant tax rate changes and associated income tax (see Note 3 on pages 115 to 118 for reconciliations). CONTENTS Strategic report 1 Corporate governance 54 Group at a glance 2 Our Board of Directors 56 Our investment proposition 3 Our Senior Management Team 58 Chair’s introduction 4 Corporate governance report 60 Our marketplace 6 Audit Committee report 68 Business model 8 Nomination Committee report 75 Chief Executive Officer’s review 10 Directors’ remuneration report 79 Our strategic priorities 18 Directors’ report 97 Key performance indicators 24 Statement of Directors’ responsibilities 100 Business review 26 Financial review 32 Financial statements 101 Non-financial information statement 37 Independent Auditors’ report 101 Risks, viability and going concern 38 Group accounts 107 Corporate responsibility 46 Company accounts 146 Five year record 153 Shareholder information 154 Annual Report and Accounts for the year ended 31 March 2019 Electrocomponents plc 1 GROUP AT A GLANCE We are a global multi-channel provider of A GLOBAL industrial and electronic products and solutions. We work together with our customers across the PROVIDER product life cycle to create solutions that make it easy for our customers to do business, saving them time and money. Through our international scale and reach… EMEA Americas Asia Pacific Revenue: £1,210.0m Revenue: £483.6m Revenue: £190.8m 8.5% 8.6% 6.2% Like-for-like growth Like-for-like growth Like-for-like growth 64% 26% 10% Percentage of EMEA revenue 44% Northern Europe 30% Southern Europe 22% Central Europe 4% Emerging markets We operate responsibly Our leading brands… Our value-added through a broad range solution brands… of industries… RS Components (RS) is the leading Manufacturing DesignSpark is our online design multi-channel industrial and electronics community and resource centre for provider across Europe and Asia Pacific, makers, students and design engineers. c. 52% as well as providing electronics in of revenue the Americas. • Process manufacturing • Electronics IESA provides outsourced procurement, • Original equipment manufacturers Allied Electronics & Automation (Allied) inventory and stores management (OEMs) and general manufacturing is a leading multi-channel industrial services, in addition to transactional provider in the Americas with a focus processing solutions. Services on automation and control. c. 38% Our own-brand… of revenue Monition is an expert in the design, • Public sector development and application of reliability • Business and other services RS PRO is our own-brand range of more and condition-monitoring systems. • Retail, logistics and wholesale than 58,000 high-quality, competitively priced products. Infrastructure c. 10% Our SBC and IoT brand… of revenue • Utilities, transport and OKdo is our global technology business, communications focused on meeting the rapidly evolving • Mining and construction needs of single-board computing (SBC) and Internet of Things (IoT) segments worldwide. 2 Electrocomponents plc Annual Report and Accounts for the year ended 31 March 2019 OUR INVESTMENT PROPOSITION STRATEGIC REPORT STRATEGIC We are committed to building a lean and scalable FOUR KEY business, which is well positioned to grow in excess of the market and drive best-in-class REASONS margins and strong free cash flow. TO INVEST • Global player in large fragmented marketplace Uniquely positioned – Market valued at c. £400 billion in attractive market – Market growing at GDP + – Top 50 players account for c. 30% of the global market • Uniquely positioned to take market share c. £400bn – One of few global players market opportunity – Leader in digital – Providing one-stop shop for customers We aim to grow at two times the market, driving share gains Driving market by: • Growing customer count share gains – Become first choice; grow promoter base – Drive more traffic to websites – Increase online conversion by improving experience 2x • Selling more to existing customers market growth rate – First choice customers spend 25% more – Scale range and add new product verticals – Roll out value-added solutions proposition – Sell the full offer; improve sales effectiveness • We have made good progress to date Building a lean and – Stabilised and improved gross margin – Adjusted operating profit margin increase of 5.0 scalable model percentage points since 2015 • In the future we aim to drive scalability and lower our cost to serve by: Mid-teen – Simplifying our technology estate adjusted operating profit margin target – Increasing the use of automation in supply chain – Rolling out global shared services and automation • Long-term aspiration to achieve a mid-teen adjusted operating profit margin • High cash conversion Strong cash and • Reinvest cash to build scale and drive faster growth attractive returns • Progressive dividend policy • Accelerate strategy via disciplined value-accretive acquisitions to: 1 – Drive market share gains >80% – Add new product verticals adjusted operating cash flow conversion – Accelerate value-added solutions offer 1. Our aim post-investment in strategic initiatives in 2020 and 2021. Annual Report and Accounts for the year ended 31 March 2019 Electrocomponents plc 3 CHAIR’S INTRODUCTION LAYING THE FOUNDATIONS FOR FUTURE GROWTH Since Lindsley Ruth was appointed Chief Executive Officer We will continue to invest in our supply chain to ensure our key (CEO) in April 2015, our Company’s leadership, customer and distribution centres (DC) around the world have the capacity supplier experience, employee engagement and financial to support future growth and are more automated, efficient performance have all been transformed. and better able to meet changing customer needs. In 2020, we will start a c. £60 million two-year project to significantly This has been another year of progress, with continued strong expand and automate our German DC. We will also invest growth in revenue and profit, and further steps forward in further in our technology infrastructure, including new product customer and supplier satisfaction. We continue to progress and content technology, to ensure we can continue to scale on our journey from a product-led distributor to a digital our product range and offer our customers an outstanding provider of engineering solutions and products. This year online experience and the one-stop shop they require. We we extended our portfolio of value-added solutions with will continue to improve our ability to process and use data the acquisitions of IESA and Monition. We see the potential to securely and effectively so that we can offer our customers continue growing our market share and enhancing operating the highly personalised data and innovative products and profit margin and will continue to take the decisions, including solutions they need to successfully run their businesses. investing in our infrastructure, to ensure we do so. Board Trading performance The Board ensures that strong and appropriate standards The year ended 31 March 2019 was another year of good of governance underlie all decisions. It sets the Company’s progress. We saw strong growth in revenue and operating strategy and oversees its delivery, and provides guidance profit. Earnings per share (EPS) fell 1.5% as prior year EPS and support to management. We try to ensure that the benefited from a non-cash deferred tax credit, which did not Board has relevant experience so it is well placed to recur in 2019. However, adjusted EPS growth was 30.3%. We provide this guidance. It is also important that the Board achieved a further improvement of 1.3 percentage points in our is continuously refreshed with new blood and new ideas. adjusted operating profit margin to 11.7% and are continuing to drive towards our long-term aspiration of a mid-teen adjusted After six and a half years on the Board, John Pattullo has operating profit margin. Our balance sheet remains strong, decided to step down as Non-Executive Director and Senior with net debt of £122.4 million and net debt to adjusted Independent Director (SID). John has been an outstanding EBITDA of 0.5x. Board member; his wealth of experience has been instrumental in bringing about the changes required to create a modern Setting ourselves up to drive sustained growth and efficient supply chain.