RS Group plc (RS1) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Electrocomponents 2021 Full Year Results. My name is Brika, and I will be the moderator for today's call. [Operator Instructions] And I will now hand over to our host, Lucy Sharma, to begin. So Lucy, please go ahead when you're ready.

Good morning, everyone, and welcome to the virtual 2021 preliminary results presentation for Electrocomponents for the year ended the 31st of March 2021. I'm Lucy Sharma, responsible for Investor Relations at Electrocomponents. If you are dialing in through the phone line, you can find our presentation slides on our website under the Investor Relations link. I'd like to introduce you to Lindsley Ruth, our CEO; and David Egan, our CFO. Over to you, Lindsley.

Thank you very much, Lucy. And after such an extraordinary year, I'd like to begin by talking about what underpins our success at Electrocomponents, and that is our people. Our amazing team has driven our strong performance this year, working tirelessly and collaboratively to support our customers, suppliers, communities and each other. Special mention goes to the essential workers in our distribution centers who came in to work every day despite the lockdowns to ensure ongoing service and continue to do so. We have been supporting our communities, too. For example, setting up 3D printing farms for personal protective equipment, PPE; designing personal ventilators; and providing free educational tools for home schooling. I'm incredibly proud of how strong our team is. I thank everyone for their hard work, positive attitude and humor, which continues to make Electrocomponents the amazing business I'm proud to lead. So turning to Slide 5. Our Destination 2025 strategy outlined years ago sets out our 5 strategic priorities to deliver value to all our stakeholders by becoming first choice, our vision. This strategic road map has been driving our market outperformance and is guiding our actions going forward. It is a plan based on 5 key principles: one, delivering the best customer and supplier experience; two, investing in our talent to maintain a high-performance team; three, continuously improving how we do things to build operational excellence; four, driving innovation, be this within products and service solutions or harnessing our digital expertise; and five, reinvesting to accelerate growth, both organic and inorganic. There is no change to the overall plan, but we have refocused our efforts to deliver these ambitions faster. Destination 2025 is about driving profitable market share growth towards our goal of a mid-teen adjusted operating profit margin. I will now hand it over to David to take you through our financial performance.

Thank you, Lindsley. And good morning, everyone, and thank you for joining our preliminary results presentation. Let me start by giving you the key messages from the results on Slide 7. We delivered a strong performance during FY '21 with momentum building through the year after the onset of the global lockdowns from COVID-19 in March 2020. Key for me is how we have proven the strength and resilience of the business in extreme circumstances and had the ability to improve our competitive position. We believe these factors plus our differentiated offer and financial strength drove the significant market share gains that we have seen. During the year, we took a step forward in our inorganic strategy, making 3 high-quality strategic acquisitions that are all performing well. Acquisitions will help us to accelerate our strategy and we have an active pipeline of further targets, but we will remain disciplined and selective in our approach. And finally, we delivered strong free cash flow and with ongoing rigorous capital discipline, generated strong investment returns. Slide 8 illustrates our financial highlights. Full year like-for-like revenue growth was up 1.4%. It fell 7.3% in the first half as COVID-19 hit, improving to a positive 10.2% in the second as lockdown restrictions eased and the strength of our model and our customer proposition shone through. Our main own brand, RS Pro, continues to outperform the group with like-for-like revenue growth of 9.7%. Digital like-for-like revenue growth of 0.9% was lower than the overall group due to less eProcurement revenue from some large customers. Pure web sales, which is a truer measure of our digital proposition and customer traffic, grew at 2.4%. Our adjusted operating profit margin fell by 1.9 percentage points predominantly due to inventory provisions and additional costs relating to COVID and Brexit. Despite this, our return on capital employed remained strong at over 19%. During the year, we focused on conserving cash, delivering adjusted free cash flow of GBP 145 million even after an additional GBP 12.5 million payment into our U.K. pension scheme and no real slowing of our capital investment program. Accordingly, we reinstated our progressive dividend policy and increased our full year dividend by 3.2% to 15.9p. We have 7 nonfinancial KPIs which relate to our ESG ambitions, which Lindsley will address later. So turning to Slide 9, I will detail 4 of them. Our CO2 emission intensity improved by 36.5% to 3.3 tonnes per million pound revenue. In fact, that is a 62% reduction in tonnes of CO2 since FY '15. Customer experience remains a core focus for the business and a key performance metric for our teams. Our group rolling 12-month Net Promoter Score was 54.4. Despite all of our team's hard work, we could not fully mitigate the impact of product shortages and longer lead times from COVID and Brexit. Improving NPS is a key focus for us all going forward. Our employee engagement score grew to 74 as our teams worked hard in keeping our people safe, connected and healthy. And our accident rate fell by 36%, resulting from safer working within our distribution centers. Slide 10 details the income statement. Like-for-like revenue growth was 1.4%. Total revenue grew by 2.5%, with acquisitions accounting for 1.5 percentage points of the overall growth. The gross margin decreased by 1 percentage point to 42.7%, which includes a 0.6 percentage point impact from inventory provisions on certain PPE products as prices fell, with the remainder being higher inbound freight costs and a geographic and product mix effect. Outside of gross margin, costs relating to COVID was circa GBP 17 million, with Brexit another circa GBP 2 million, reflecting increased freight costs, brokerage fees and a higher cost to serve. Many of these costs have continued into the current year, although we should see reduced brokerage fees when our distribution center expansion in Germany comes onstream in early autumn. Our RISE initiatives to streamline and simplify the group delivered GBP 7 million of benefit and is on track to deliver the full GBP 25 million of benefit over a 2- year period. There was an GBP 11 million substantial reorganization cost, less than the charge booked in the first half, as some plants were stopped due to Brexit, more people with less service years left and we redeployed people from redundant roles into vacant positions. The 3 acquisitions contributed GBP 29 million of revenue and GBP 2 million of adjusted operating profit since joining the group. Our adjusted effective tax rate was 21.8%, in line with last year, helped by circa 1 percentage point from one-off tax credits, which are unlikely to repeat. Looking forward, we expect the FY '22 tax rate to rise to circa 24%, with further increases in the out-years as the effect of corporate income tax rate increases in both the U.K. and the U.S. come into effect. On Slide 11, we see that all regions had positive like-for-like revenue growth. Industrial production data shows our core markets gained share as can be seen on a chart in the appendix. We've provided revenue data and our trading update on the 13th of April so I will concentrate on the profit metrics within this presentation. Starting first with EMEA, which accounts for circa 64% of group revenue. Like-for-like revenue was 1% up during the year, with nearly an 18 percentage point swing in performance between the 2 halves. The gross margin decline was largely due to the inventory provision on certain PPE products. Operating profit fell by circa 15%, a result of the lower gross margin and GBP 13 million of extra costs associated with COVID and Brexit. The operating profit margin was 13.5%. Needlers and Liscombe, our 2 PPE acquisitions in the U.K., contributed GBP 1.6 million to the profitability within the EMEA region. The Americas, which is circa 26% of group revenue, saw like-for-like revenue grow by 1.4%, with a circa 19% swing in performance between the 2 halves. There's been a lot of change within our Americas business over the last 2 years. We've transformed our senior management and sales force teams. We doubled the capacity of the distribution center, refocused our marketing initiatives and acquired Synovos. We're starting to see the benefits coming through from this repositioning. The gross margin rose due to less discounting and better price optimization, offsetting the inbound freight inflation. Operating profit declined by 8%, with higher operating costs relating to supply chain, labor and depreciation from the DC investment. The operating profit margin was 10%. Synovos contributed GBP 0.5 million of operating profit since its acquisition in mid-January. And finally, Asia Pacific, which accounts for circa 10% of group revenue, saw like-for-like revenue grow by 4.6%, with a 13% swing from the first half into the second. We have broadened our product offer, restructured our country operations and refocused our sales force. The gross margin declined largely due to a mix effect from stronger revenue from lower gross margin product. The operating profit fell to GBP 1.4 million, with the higher cost on a small profit base more than offsetting the revenue growth. On Slide 12, we detail our adjusted free cash flow of GBP 145 million, which benefit from tight working capital control. Our working capital to revenue ratio was 21.8% for the year, a great performance. Inventory churn was 2.7x with delays in receiving products due to Brexit and the Suez Canal blockage. Net capital expenditure was GBP 55 million as we focused investments on key value levers such as our distribution center expansion and technology platforms. Our expanded DC in Fort Worth, U.S. was completed in the first half, and we continue to invest in expanding our distribution center in Bad Hersfeld, Germany. We anticipate capital expenditure in FY '22 to be circa GBP 65 million. We delivered 100% adjusted operating cash flow conversion during the year, providing strong financial support for our investment program. During the year, we acquired 3 strategic businesses detailed on Slide 13. Synovos is a leading player in integrated supply solutions based in the U.S. and very similar to our IESA business. We see significant cross-selling synergies between Synovos, IESA, Allied and RS Pro. Needlers and Liscombe expand our product and services solutions offer in safety, hygiene and PPE, allowing us to capture a greater share of spend with new and existing customers. All 3 acquisitions are performing in line with expectation with integration and cross-selling opportunities on track. Our pipeline of acquisition opportunity remains strong. On Slide 14, we note how we are optimizing our capital allocation. During the year, we delivered strong cash generation, refinanced and increased our debt facilities and raised equity to fund our acquisitions. Given our strong performance, the Board resumed our progressive dividend policy, paying a deferred final dividend from last year in December 2020. We returned to our normal dividend timetable this year, paying an interim dividend in January, and the Board proposes are 9.8p per share final dividend, giving a full year dividend of 15.9p and dividend cover of 2x. The group's financial metrics remain strong with net debt to adjusted EBITDA of 0.5x, providing us with the financial base to support both organic and inorganic growth investments. Moving to Slide 15 and current trading. The first 7 weeks of FY '22 has seen very strong growth. Comparatives on either a 1- or 2-year view provide good tailwind. On a 1-year basis, this is due to weaker comps from the first COVID-19 lockdown, and on a 2-year view, we saw a very slow start to the year, particularly within the Americas. Looking at our current performance, on a 2-year view, revenue growth remains robust, a broadly low double-digit CAGR. Our performance in the Americas continues to benefit from a wider product range, improved digital performance and much easier comps. We're particularly pleased with the robust performance in EMEA, given ongoing lockdown and the logistical challenges presented by Brexit. And Asia Pacific remained strong, helped somewhat by the buoyant electronics market. We're mindful of ongoing uncertainty regarding COVID-19 and its variants, continuing cost pressures relating to freight inflation and Brexit, currency headwind, thus the potential for some supply chain constraints later in the year. However, we're well positioned to make good progress this year, and our expectations for strong growth in FY '22 remain unchanged. With that, I'll hand you back to Lindsley to go through our strategic opportunity. Over to you, Lindsley.

Thank you, David. Turning to Slide 17 and the significant growth opportunities we have. I'd like to talk about 3 things today: the 4 needle movers that will drive top line and market share growth, how we can do better at the basics to drive operational leverage and how we are accelerating our growth opportunities through acquisitions that strategically and culturally fit and financially add value. Combining all 3 will drive profitable market share growth and improved operating efficiencies to achieve our goals of a mid-teen adjusted operating profit margin. Slide 18 lists 4 needle movers underpinning our market share growth: one, our product and service solutions proposition where we work in partnership with our customers to deliver sustainable cost efficiencies; two, a strong customer experience through our omnichannel offer to deliver a frictionless service; three, our unrivaled breadth of product choice, an industry-leading availability providing security of supply; and four, our specialist own brand, RS Pro, product, which widens our offer and improves our margins. These are all delivering our outperformance versus peers, a testament to the hard work of our people who are driving this. So what are we doing within each area to leverage our advantage further? We move to Slide 19. We're competing smarter through our products and service solutions. Our customers want solutions to their procurement problems from a trusted partner that understands their business. Our expanding service solutions offer moves us beyond pure product distribution, differentiating us against transactional peers and improving customer loyalty and ultimately, customer lifetime value. And when we provide a solution, it brings increased product sales and a higher average order value with the customer benefiting from the cost and time efficiencies. The graphic on the right-hand side of the slide illustrates the range of procurement solutions we offer, from the more transactional to the fully integrated depending on our customer requirement. Additionally, our technology-driven model means that we are at the forefront of the changing world. So for example, we have connected the industrial assets of a major U.K. logistics operator to a cloud-based reporting and condition monitoring system. This generates data which helps them predict their maintenance needs and improve their productivity through using digitally enabled operational tools. Meanwhile, IESA and Synovos have a strong pipeline of new business wins and opportunities. IESA has won a number of contracts, with the majority in Europe, and is working with Synovos on joint pitches to some high-profile global corporates. Synovos is also working with our business in Asia Pacific on another joint pitch with a global corporate. We're in industry-leading position and offering a truly global integrated supply solution. So to Slide 20. Slide 20 shows how we are unlocking opportunities to improve our customer experience. We are a leading omnichannel operator within our MRO competitive set, which allows us to provide superior customer service, but we don't want to be the top in just our competitive set. We want to provide the best experience against whoever we compete. On this slide, we show on the left-hand side a table, where we are now. We have over 14 million visits per month to our website and specialist knowledge providing a wide service to all. On the right-hand side, we see the opportunity to drive our data harder, and we have hired digital and brand experts to get us there. Our journey is to improve our customer experience further, be it data or insight led; adapt our service according to the customer; and focus more on the higher-returning options through knowing our cost to serve better. We're already seeing benefits from the improved marketing efforts, meaning we have been able to reduce paid advertising spend, drive more organic traffic and thus, enhanced returns. Overall, we are aligning our digital capabilities and service to maximize customer lifetime value. Slide 21. Slide 21 illustrates the breadth of our product offer versus our peers and the opportunity, more importantly, to expand further. The breadth and depth of our product offering continues to set us apart from our competition, and we have over 650,000 stocked industrial and electronic products and over 3 million unstocked products. Our customers increasingly want a one-stop shop and security of supply, and we have industry-leading availability and service. The investment into our distribution centers is widening our product offering. By March, we had 37,000 more product stocked in our Allied distribution center in the United States. And our acquisitions are broadening the depth of expertise within each category even further. We're already seeing Needlers winning contracts to supply PPE products for IESA's customers as an example. Our offer is led by innovation and our electronics range, which, alongside our design and technical expertise, means we can help advise and supply our customers on their journey to remain relevant in this digital industrial revolution. So the last of our needle movers, on Slide 22, is developing our strong own brand offer, RS Pro. And it is our main own brand, RS Pro. It continues to outperform the group, offering a quality value product for the customer and delivering revenue at a higher margin for us. RS Pro utilizes our extensive digital and customer data to design products in ranges our customers want, such as our very successful test and measurement kit as businesses return to work. The team is working closer with our digital marketing function to grow brand recognition, website traffic and add-on sales through more targeted marketing campaigns and a more personalized customer journey. We see significant opportunity to develop our own brand further, especially in the Americas where penetration is less than 1%, and we can offer RS Pro to Synovos' clients as we do with IESA's. Further growth will be driven by new product launches and targeted marketing campaigns, and we're already working on the opportunities to develop our newly acquired PPE brands in the same way through our extensive distribution network. We are also developing a sustainable product range, providing quality products across various categories. So the second part, on Slide 23, of delivering Destination 2025 is detailed on this slide. And we've done much work on building the foundations, becoming a leaner organization since I joined 6 years ago. But the successful delivery of 2025 needs us to improve our operational basis even further to be best in class in each discipline, including negotiating better buy-in prices; understanding our cost to serve; leveraging our existing capacity, utilizing our extensive database to be insight led; sharing best practice and expertise on marketing, digital, innovation and product and supplier management; and even reengineering supply chain to be more sustainable and closer to the customer. Overall, we want to be globally connected but locally delivered and we want to do it better. Slide 24 pulls together the work we're doing on improving sustainability through the supply chain. Our supply chain strategy is customer-centric with multiple distribution centers regionally located. This allows us to provide a fast delivery service to our customers and be agile, which was crucial this year so that our service continued largely uninterrupted. We have invested heavily in our operations over recent years to reduce our environmental impact by progressively installing solar panels, implementing energy-saving initiatives and using renewable energy, but we're not stopping there. We want to transform our supply chain operations further. We're working with our supplier base today to reduce unnecessary transportation routes through restructuring our network, both inbound and outbound. This will result in more deliveries direct from the manufacturing location via sea rather than airfreight, growing the level of inventory we hold locally and increasing regional sourcing options. This will significantly lower carbon emissions from our supplier base and third-party delivery network and improve product availability, delivery times, consistency and customer service levels. This is a large project as we restructure decades of historic working but one we are passionate about delivering. The last part of the jigsaw to accelerate growth is through inorganic opportunities on Slide 25. Our prime strategic priority, of course, remains driving organic growth and the key areas outlined already. Where we already have the supplier relationships and in-house expertise, we are building out specialist ranges and services our customers require. However, we can see that we can accelerate this growth through inorganic expansion. We're focusing on 3 key areas, which, in order of priority, are products and service solutions, product extensions and adjacencies and geographic development. And we definitely have a strong pipeline of suitable opportunities and the financial strength to add further acquisitions which fit strategically and culturally and where we can generate meaningful value. So turning to Slide 26. Part of Destination 2025 is making amazing happen for a better world. We're committed to accelerating the positive impact we have on society and on the environment by inspiring a more sustainable world through education and innovative solutions that improve lives. This year, we have strengthened our ESG approach which is focused on 4 key pillars: the environment, customers and suppliers, people and health and safety and the community. Each pillar has a clear commitment and 2025 target, which are outlined on Slide 34, with the more in-depth ESG presentation available on our website under the Investors Financial results link. But doing the right thing in terms of working towards a more sustainable and inclusive future is not new to us. We've been integrating this as part of our business as usual for years, which brings us to Slide 27. This business as usual is across our entire group, as illustrated here, and ranges from providing a free online design community to over 1 million members in DesignSpark, restructuring our customer delivery routes to be more environmentally efficient through IESA and Synovos, providing more energy efficient solutions through RS Monition, to name just a few. All our work has been driven from within to deliver sustainable growth. I am fully responsible and committed to our ESG approach. And our president of our global supply chain leads the planning, execution and governance of all we do. Our new VP of social responsibility and sustainability is bringing together all work to develop further targets beyond Destination 2025. I am incredibly proud that our ESG work has gained recognition by external agencies, including MSCI ESG A rating, the CDP climate change leadership score of A-, being tenth out of 13,494 companies with Sustainalytics and a gold medal rating by EcoVadis. We know our ESG is working positively across our business, and we've just won a large contract with a major global customer in the Americas who mentioned our ESG commitment and technology innovation as being 2 differentiating factors. So we look to improve our ESG further going forward. So in summary, on Slide 29. We're excited about the opportunities we see. There will be pressures ahead and we're, of course, mindful of the ongoing external headwinds, but we have less than 1% share in a GBP 400 billion global market where our differentiated model sets us apart from our competition. We're driving market share growth through ongoing development of our products and service solutions; customer experience; and our product offer, including our own RS Pro specialist brand. We have a well-invested operating model, which we are leveraging and simplifying to drive sustainability, scale and a lower cost to serve, and we're cash-generative with a strong return focus. Our ESG ambitions are part of our Destination 2025 strategic plan. And I'm proud of the ESG journey so far, but see more to do going forward. We're excited about our future and the opportunities we have to accelerate our growth through organic and inorganic expansion. Thank you for listening. Now I'll pass you back to the operator to open it up for Q&A.

[Operator Instructions] We have the first question from the phone line today from Kean Marden of Jefferies.

Thanks for the additional language on the 2-year stack. So it looks like in the first 7 weeks, you're running basically about 20% up on the equivalent level in 2019. I think as you pointed out, you sort of started the year slowly but you also exited the year quite slowly as well. So the comp sort of gets a bit more difficult but then it gets easier as the year progresses. Is there any reason why your business shouldn't continue to be 20% bigger broadly than 2019 over the remainder of this fiscal year? That's the first question. Then you're obviously trying to flag some additional costs in the business. So we can sort of break down sort of the COVID and the Brexit cost being something in the region of GBP 30 million headwind in the year just gone. Just wondering if you can help us understand how some of those linger in the current fiscal year. And can you call out things like FX translation and supply chain potentially as additional costs that we might want to overlay on to that as well? And then I've got some more but I'll stop there and just give it to you for the moment.

Kean, David here. Let me address your first question with regards to our performance in the first 7 weeks. I think sort of the first thing is it is only 7 weeks of activity. As we said in the statement, we have started the year in a strong mode. If you look on a 1-year comp basis, obviously, we've outperformed significantly, but that's really off the back of the subdued numbers as a consequence of COVID. If you look on a 2-year basis, we had a very slow start to the year in FY '20 and in particular within the Americas. So we are running at sort of double-digit CAGR on a 2-year basis at this point in time. As we look forward for the full year, our visibility remains negligible or very minimal. Consensus is currently at around 9% growth for the full year. Our comps do get harder. So we did deliver 10% growth in the second half of FY '21, so the comps will get harder throughout the balance of the year. At this point in time, given we're only 7 weeks in, we're sort of -- we're comfortable with where consensus is, but we'll provide a much broader and more robust update when we go through Q1 at the beginning of July. With regards to the costs, we called out GBP 19 million of cost in the statement for FY '21. GBP 17 million was COVID, GBP 2 million was Brexit. As we look forward, the GBP 2 million of Brexit will moderate but probably later in FY '22. Those additional costs are largely broker related, and we can't moderate them completely until we get the Bad Hersfeld German distribution center up and running fully. So that's really during the back end of FY '22 that they will moderate. On the GBP 17 million of COVID costs, GBP 12 million of that is freight related. We haven't seen any moderation of freight. We had hoped to migrate from air to sea, which we did. But equally, we saw freight rates of sea increase. So the GBP 12 million is not something that we're expecting to go away anytime soon. And the balance of the GBP 5 million, which is largely inefficiencies off the back of COVID, where you are still running inefficiently because of social distancing within our distribution centers, but we would expect that to moderate as lockdowns ease throughout the world.

We now have the next question from Rory McKenzie of UBS.

It's Rory here. Firstly, I wanted to ask about your customer numbers and customer trends. How did the customer numbers finish the year? And maybe exclude kind of B2C and just focus on the kind of core B2B customers. Has that accelerated through the pandemic? I know that customers typically start with a very small wallet share, but again, just trying to ask how much your business footprint has structurally expanded. And then secondly, maybe following up from Kean's question. Where should we be worried about revenues falling back in any areas? Do you expect some of that B2C revenue growth to disappear as behavior normalizes? How much revenue from PPE might disappear over the next year? Maybe those 2 first, and I've got one on margins, please.

Yes. Rory, this is Lindsley. On customer trends, our customer count for overall was up 18% year-over-year. For B2B, it was up 8%. And so we have seen a strong growth in terms of, obviously, customers via the website. I said we're up to -- 14 million is what our average was last year, but we actually hit over 15 million customer visits in 1 month in the last couple of months. So we're doing a good job at acquiring new customers as we broaden our product portfolio and as we add the acquisitions. As far as the revenue growth, I'll just -- I'll turn that to David to kind of respond to that. But I'd just say PPE is still a very small percentage of our total number, and overall, B2C is not as profitable as our B2B business.

Yes, Rory. Yes, PPE has had negligible benefit to us in FY '21, and we would see that the main sort of growth in PPE is really off the back of the acquisitions that we've acquired. We've given you guidance in terms of their revenue contributions on B2C, minimal contribution. We would -- sort of minimal sort of one-off contribution in FY '21 and would expect that to continue going forward. In terms of the watch-outs for us on the revenue, I think sort of the main -- the 2 that I would just sort of call out with a degree of caution: one is just the whole supply chain, the end-to-end supply chain. We're not seeing any material challenges at this point in time, but there are some shortages of product. And they all are certainly customers or segments -- and segments that are seeing slowing of their manufacturing activities. So again, we haven't seen any material impact on our business versus, say, other companies that have called out. And then the second one is just inflation and price -- inflationary cost increases/price increases. Again, we haven't seen any material changes in that regard, but it's one that we're monitoring very, very closely. To date, the cost increases from a product perspective, we've been able to pass on. And then wage inflation, we are seeing wage inflation running through our business really off the back of a positive benefit of giving our people a pay increase versus wage stability during the course of the last year. So overall, they are the 2 watch-outs but they're not having any material effect on our business at this point.

Okay. Great. And then just on the margins. On Slide 17, there are more and more initiatives on the #2 there to drive operating leverage, which is interesting, especially on the whole shift in supply chains because of the customers. Can you talk about what you've learned from the expansion in the U.S. DC? And can you remind us what the time line is for Germany now? And what that would mean for your European business overall?

Yes. So on that front, Rory, let me first start with Germany. We see Germany and the expansion in Germany as an opportunity to serve the pan-European market. So it's going to allow us to deal with that cost and a lot of the Brexit costs much more effectively and efficiently and stop having trucks stopped in different areas as an example. And so most freight companies are still trying to work through the challenges of Brexit. I think we were well prepared, but a lot of our suppliers were not well prepared for Brexit. So Germany will be -- it's on track to open with our new distribution center and expansion in September. It's obviously fully operational now, but we're on track for a September launch of that facility. In the U.S., what we've learned is -- we've signed a lot more suppliers. So we've added 50 new suppliers in the U.S., and we're broadening our range significantly. And I was there obviously -- I'm in the U.S. now. I'll be back in 2 weeks, but it's really exciting. David came over a few weeks ago and -- to see what we're doing with that team. As he mentioned, it is truly remarkable. So huge upside in the U.S. with our operations and overall facility.

The next question comes from David Brockton of Numis.

I've got 2 questions, please. The first one relates to market share gains. In the appendices, you've kindly set out how you think you're performing across all regions. The one region where you seem to have not outperformed, I guess, in Japan, yet you referenced that market being buoyant now. So the first question is do you think you are now taking share? Or are you just matching the market? And what do you think you need to do to change there, if not? And then the second question just goes back to the customer numbers that was asked earlier. That seems to be growing faster than revenue growth. And I guess clearly B2C has driven a part of that but B2B was also up. So it implies average order frequency was down. Just, again, interested in your insights into that. Is that COVID related? Or is there anything you can do there to improve average order frequency?

Yes. Those are great questions, David. Let me take the Japan question first in terms of market share gains. So first of all, it wasn't part of your question but we're taking market share from the small and regional distributors, especially those that did not have the capability to work virtually from home. So we've seen a significant increase in market share from those types of companies. In Japan -- 92% of our sales in Japan historically has been in electronics, so we're not a strong player in the Japanese market. So it's -- we've seen it more opportunistically. So that's why we've called that out as a decline because we're just not -- we're shifting our focus more from electronics to MRO in the Japanese market as we move forward. But our focus in Asia is more on Southeast Asia, China and Australia and New Zealand as priorities. I think in terms of B2B -- I think on the B2B side, the average order frequency, what we've seen is, because of the reduction in the number of buyers and maintenance engineers during COVID, we've seen an increase in customers but a decrease in average order frequency as they haven't been able to buy all the products that they typically would buy. So the restocking hasn't been as high as it has. If you got 8 buyers versus 15 because they're furloughed, you're going to buy only with unplanned or what's necessary. So we've seen average order frequency go down slightly because of that, but average order values continue to do well overall. So that's the flip side of the coin.

I think just one build, David. The Japanese market for us is around 2% of our overall group revenue. So it's a small market for us. As Lindsley said, we're not as well positioned in electronics. We are moving a little more into the industrial side of activities and holding our own, I guess, where we are at the moment.

The next question from the phone lines we have is from Jane Sparrow of Barclays.

I just had 2 on the supply chain. Firstly, from an ESG perspective, you've obviously been doing a lot on your own actions around energy efficiency and so on. But as you expand the product offering, could you comment on what practices you have in place around auditing your suppliers to ensure they are aligned with your own objectives? Do you have a sort of global supplier code of conduct? Is it done on a local level? So just some commentary there. And then secondly, on the inventory initiatives around holding more inventory locally to improve customer proposition, could you just comment on what impact you expect that to have on inventory turn in the medium term?

Yes. Let me take the first part of that. From an ESG perspective, we do audit all the suppliers that we look at signing. So we have a very well-organized global process for core product offering that we plan to stock, so we're looking at that. We're developing standards for that as we speak as it relates specifically to ESG, but it is something that's really important and is important for the supply chain. And from an MSCI perspective, I spoke to their CEO recently, so we're looking at a lot of data and information to become more efficient in how we do that from an ESG perspective. In regards to inventory, I'll let David comment on inventory, but I'd just say that what we're looking to do is be able to stop, for example, having product go from China to the U.K. back to China or China to U.K. to Germany. So from an inventory standpoint, we're not talking about a significant impact to turns. It's more about where we source and stock products and how we make sure there's no price inflation because we're buying less in terms of quantity in the U.K.

Yes. Jane, David. Our turns for FY '21 were at 2.7x. We are looking to put a bit more inventory -- absolute value inventory into the system. We've seen, as we put inventory into our distribution center in the Americas, that that's had a positive effect in terms of velocity and driving the top line. We'll obviously be doing the same over time in Germany. But equally, just to support and to protect our supply chain, we'll be putting a bit of additional inventory into the system. I wouldn't call it sort of completely out of this world and we're not going to destroy our inventory turns, but it might soften a little bit. But overall, we'll be investing a little bit more as we've done with Brexit with regards to inventory levels.

We have the final question on the phone lines from Henry Carver of Peel Hunt.

Just a follow-up for me on market share comments. I mean clearly, you're taking share against the smaller players, which you sort of expect in a tough environment. I just wondered if you got any comments around how you might be doing against some of the other larger players and if you're outperforming them as well. Any color would be much appreciated.

Yes. I'm always hesitant, reluctant to comment against the larger players because we want to stay off their radar, but we definitely are winning share against the larger players as we expand our range. But I'll just leave it at that. It's the smaller regional players we're winning share, but the larger players we're winning share, too. And there's -- yes, I think it's pretty clear some have struggled during COVID because they had -- they didn't have the ability to work from home and they didn't have the ability to do the projects and to collaborate as effectively as we have. So -- but the larger players that are out there, we know who they are, and we have a breakdown of where we're winning products in each of those categories.

And again, just one small build, Henry. I think we are definitely taking great share with regards to the industrial competitor landscape. We are growing certainly in electronics, but we're not as well positioned in electronics. So again, we don't necessarily reap the rewards on the upside, but equally, we don't necessarily reap the challenges on the downside. So again, we're holding our own on electronics, but certainly outperforming in the industrial.

We now have a follow-up question from Kean Marden of Jefferies.

Sort of the follow-ups. Could you maybe share when you're going to roll out the Needlers PPE product range into the RS Pro? And then on the state -- Lindsley, did you mention that you've increased stock -- SKU numbers by 37,000? And if so, over what time period were you referring to? And then just finally on inflation, not typically something we've had to worry about with Electrocomponents because some of your products are deflation rate and so therefore, price has never really been much of a discussion point for a while. But obviously, you've got low stock turn. Your sort of inventory accounting policy, I think we used time weighted as well. Is there potential for inflationary gains to come through if prices do pick up and you're sat on that low stock turn?

Yes. So I'll comment, and then David can comment. I think on Needlers, what we're doing is we're integrating Needlers into the European operation, and we'll be able to take those products on a global basis. So when it comes to private label, we have to slowly look at how we've changed those names contractually with customers of the products that Needlers has because they do have their own private label brand. And as you remember, 5 years ago, we converted all 4 of our private label brands into one and came up with RS Pro, so RS Pro didn't exist before 5 years ago. So we'll certainly look at what we can do more in terms of renaming those products RS Pro over time. The 37,000 parts, we had over the course of the year. So we expect to add a lot more in the next couple of years as part of Destination 2025. As David mentioned, we've got 3 million unstocked products we offer. We'd love for that to be around 10 million. And we have 650,000 stocked core products today. That does not include noncore that might just come through the warehouse and go out. Those are stocked products. I would expect that to more than double over the next couple of years given our investment in capacity, as we talked about before. The last question in regards to inflation, you got to remember, and David can comment on this, too, our average order value is quite low. So when we get price increases, it's easier for us to pass them along than some of the volume distributors. So with an average order value of less than GBP 200, it's not the same as an average order value of GBP 20,000 like some of the large electronics volume distributors get, where it's more challenging. So it's more about availability and supply chain disruption and making sure we mitigate that. And that's the huge advantage of having the turns we have today, is we've got a ton of inventory on the shelf which helps us during this -- there's supply chain disruption all over the place now, but it helps us during this period.

Yes. And Kean, I think with regards to inventory valuations, there's always swings and roundabouts in terms of cost increases or cost reductions or price increases, price reductions on the inventory values. We don't expect there to be any sort of material positive or negative variance as a consequence of inflation flowing through. We're not looking to -- we're looking to pass on cost increases, and we'll certainly move our margin forward with internal objectives as best we can. But we certainly -- we're not using the situation to be -- to do anything untoward. So I think it's in the ordinary course in terms of provisions. One final comment on Needlers. What we have seen with Needlers is that we've brought some of the Needlers products into the RS offer. And equally, IESA is now sourcing Needlers product through their customers. So again, we are driving those synergies off the back of the acquisition of Needlers and Liscombe here in the U.K. to the PPE products.

[Operator Instructions] We have a follow-up question again from Jane Sparrow of Barclays.

It was just 2 follow-ups, if I may. The first one was, David, I think you already commented on wage inflation. But speaking to some other companies operate in the U.S. specifically, they've said that labor availability generally is a bit of an issue with some people in certain roles happy to sit at home for a couple of months now that they've received their COVID checks, and that's impacting their ability to meet service levels. Are you seeing anything in that area? And then the second one was just on eProcurement with large customers. You said web sales have continued to be strong. But can you remind us how much of digital revenue comes from pure web sales versus eProcurement and whether those eProcurement sales with large customers have started to come back strongly at the start of this financial year?

Yes. So Jane, just on the eProc, 2/3 of our sales are web sales and 1/3 is eProc. And we have definitely seen those sales start to return. But where we've really been -- and that's important. eProc is something we're developing on the Americas as a capability that we never really had significantly as Europe. But when it comes to the website, I'm really proud of what our team's done. And we've really transformed search engine optimization, as David commented, so that we can spend less on paid or should get a higher return on our website sales. And obviously, the margin is slightly higher. So in terms of inflation, I'll let David take that question. But I'll just tell you this, because I'm in Texas now and it's really early in the morning, we haven't seen a loss of employees over what you commented on. And we didn't have the furlough situation like the U.K. in the U.S. So we run a pretty lean organization in the United States in terms of the operational teams. And with the DC expansion, obviously, we're having to add resources as we grow our inventory and as we expand our operations. So it's not really COVID related. It's more about the availability of labor in the Dallas-Fort Worth market.

Yes. And the overall wage inflation running through the business in the year FY '22 is probably going to be somewhere between 2% to 3% on a full year basis. Again, we had wage freezes, not reductions, but wage freezes last year, and this year, we're going forward with a normal pay increase process.

We have no further questions registered, so we'll hand it back over to the management team.

Okay. Well, thank you very much, everyone, for joining today. And as always, we're available for any questions you might have so let us know. And thank you for joining and spending time with us.