RS Group plc (RS1) Earnings Call Transcript & Summary

Right. Good morning, everybody. Thanks very much for attending this morning and thank you all for your interest in the RS Group. Welcome to our full year results presentation for the year ended 31st of March 2023. Just before we get into the meat of the presentation, a bit of health and safety stuff. There are no planned fire alarms this morning for those of you attending physically. If an alarm does go off, you'll be directed out of the building by fire marshals, to find the fire marshals take any of the exits marked with the green arrow. 2 stairwells in the main lift lobby area, please walk to the ground floor, exit the building into Wood Street and then meet in Aldermanbury Square and make yourself known to a new miss or to an RS contact person, and they will advise you when it's okay to get back into the building. So I'm Simon Pryce, the recently appointed CEO of RS Group, and I'm joined by Jane Titchener who was appointed our interim CFO a couple of weeks ago. I don't know what she's been doing for the last couple of weeks, but anyway, welcome, Jane. I've been a NED at RS for 6 years prior to taking up the CEO role, but perhaps more importantly, Jane has been at RS for over 15 years in various roles, heading our tax, developing strategic planning, M&A and most laterally was CFO of our Asia-Pacific region. So she is very well informed on what's really going on in the RS Group. We're also joined in the room by a number of our RS senior leadership, including Lucy and Sophie, who you will know from IR. But we've also got, and I'll ask them to just stand up so you know who -- put a face to a name. Doug Moody, who leads Americas; Pete Malpas, who leads Europe; Christian Horn, who leads product and supply management and Jerry, who is -- Jerry Abrahams, who leads our RS PRO and pricing and various other of our colleagues are in the room. We think the presentation will at least a run-through, takes about 40 minutes. And so that should leave you plenty of time for questions, but we'll try and get you away by sort of 10:00, 10:15 if that works for everybody. So 2023, I think, was another strong performance for RS. We saw, as the slide shows, good growth in revenue, up 17% and 10% on a like-for-like basis after adjusting for currency trading days and our 2 completed acquisitions. We saw strong conversion with operating profit, PBT and EPS all growing by mid-teens like-for-like and solid cash generation even after the continuing investment in strategic development and operational excellence as well as a couple of one-offs that Jane will talk about in a minute. The Board is proposing a 16% increase in the full year dividend and returns on capital employed showed further improvement, and that's even after a significant level of investments. And even after that, we still have plenty of balance sheet capacity to accelerate strategic realization should opportunities present themselves. And as the chart at the bottom of the slide demonstrates, we continue to grow well over double the rate of global industrial production. And whilst we did see a good growth still in the second half, we did experience a slowing in the rate of industrial production as well as an easing of some supply chain constraints in electronics, which created a much more competitive electronics market. And we also saw the anticipated impact of our strategic decision to exit Raspberry Pi in our OKdo business, whilst we develop a different product range, much more suited to our RS customer group and one that we could actually make money out of, which did reduce revenue in the second half by about 3%. So hopefully, I think you'll agree with me that actually it was a very strong 2023 for RS even given the slightly increased headwinds in the second half. But not only was it a good '23 as it relates to financial performance, but it was also more importantly one of good operational and strategic progress. We've rebranded all of our B2B businesses on to the RS name. We continue to make major operational and strategic investments to drive long-term and sustainable value creation in this group. Our programs to enhance our product content and content capacity and management and the acceleration of new product introduction are all well advanced. We continue to upgrade our data, technology and digital platforms. Our investments in freight and distribution optimization are already beginning to yield good cost benefit and also to reduce our carbon footprint. And we're using much more detailed user analytics to continue to enhance our digital customer experience. And finally, we continue to develop and test much more innovative service solutions for customers that are scalable across the group. We introduced our Better World range, providing customers with greener and more sustainable alternatives to support them in their carbon-neutral journeys. And of course, we completed GBP 234 million of acquisitions with Domnick Hunter and Risoul in Mexico closing during the year. And of course, after the year-end, we reached agreement to acquire Distrelec for just over GBP 320 million. So to me, all of this demonstrates that '23 was a really good all-around year for RS and our stakeholders. But it was only delivered because of the extraordinary efforts of our great people who've done lots of good stuff in this business over the last few years and have created a great platform for us to kick on from. But there's still so much more to go after and so much more to do in this business, of which a little bit more later. But now I'm going to hand over to Jane and she'll take you through the detailed financials and how we've started '24.

So on Slide 7, we summarize our strong profitability, returns, cash and shareholder value creation over the last year. We delivered a 13.5% adjusted operating profit margin, which reflects nearly 30% adjusted operating profit conversion. We generated over GBP 260 million of adjusted free cash flow and over 30% return on capital employed. And the Board has proposed a final dividend of 13.7p per share, which gives a full year increase of 16% and cover of 3x. So if we move on to our income statement on Slide 8 which shows that our total revenue, including acquisitions, increased by 17% to GBP 2.98 billion, and our adjusted PBT grew 25% to GBP 391 million. During the year, we've been able to take advantage of our strong product availability during the time of supply constraints, and our gross margin has benefited from some pricing inflation. Please do note our guidance slide in the appendix, which guides to a 26% tax rate in the current year because of the increased U.K. corporate tax income rate. So moving on to looking at revenue in more detail on Slide 9. Total revenue growth was 17%, 10% like-for-like growth. And this was largely driven by price inflation, a 2% contribution from acquisitions and 5% from currency. As Simon has already said, growth slowed with first half like-for-like of 16%, but only 4% in the second half. Full year like-for-like growth would have been 2 percentage points higher at 12% if we exclude the impact of our single-board computing business offer OKdo. And there was a big disparity between our industrial performance of plus 16% and electronics, which grew by 1%. So on to Slide 10 where we detail the drivers of the 1 percentage point improvement in our adjusted operating profit margin, which increased to 13.5%. Firstly, we had the benefit of our revenue growth. Our gross margin grew by 1.1 percentage points, 1.8 percentage points like-for-like, and this was driven by the benefit of sell price inflation, inventory turns of 2.6x and our margin optimization work. There was a diluting impact on our gross margin from currency and from our acquisitions and the latter will partly unwind as we integrate and align these businesses with ours. Total operating costs grew by 18%, with adjusted operating costs growing 13% on a like-for-like basis. Underlying cost inflation was mid-single digits. But we also have strategic investments over and above our business as usual of around GBP 20 million, GBP 7 million more than the prior year. And there were also 2 ad hoc payments totaling GBP 10 million made to our employees which helped reduce our employee turnover rate to under 10%. So if we now move on to look at the regions, we'll start with EMEA on Slide 11. Like-for-like revenue grew 12%, and operating profit margin was 15.6%. Our performance in EMEA continues to benefit from the investment we've made into our growth accelerators, products expansion, value-added solutions and digital and customer experience. We've been focusing on our larger industrial customers, improving our customer journey with digital revenue up 16%. We're providing more service solutions that grew at 21% and we're improving our specialist range offer, including our main brand -- own brand RS PRO, which is up 21% and driving growth in our share of customer wallet. Our operating profit margin is benefiting from price inflation, margin optimization and operational efficiencies despite ongoing operational investments. We believe the flywheel effect we've talked about before is the most mature in our EMEA region. So now on to the Americas on Slide 12. We saw 11% like-for-like growth and a 1.9 percentage point improvement in the adjusted operating profit margin to 15.7%. Our trading performance has been driven by our extra capacity after our DC expansion and strong product availability, which has allowed us to take advantage of market opportunities. In the first half, we benefited from customer stocking up to avoid production disruptions and increased demand from more transitory customers and resellers who are seeking products. In addition, we integrated our sales and marketing teams and plans, and we had stronger sell-through of our solutions offer, which increased to 34%. We've improved our proposition in RS Integrated Supply in the Americas. However, in Q4, we saw a slower market, some industry destocking mainly within our OEM and manufacturer customers, loss of some of those more opportunistic low-value customers who are now reverting back to their former channels and some disruption to our digital organic search due to our rebranding. We're continuing to invest in our model to move from being a product distributor with a narrow customer focus and the rest of the group to a more broad-based product and solutions provider across the MRO market. During the year, we improved our operating profit margin through pressing -- through price inflation and sales leverage. And we're really pleased that our acquisition in Mexico Risoul is operating slightly better than expected and more on that later. And on to Slide 13 and Asia Pacific. Revenue here fell 2% like-for-like, mainly due to the nearly 70% decline in single-board computing products sold through OKdo. Excluding OKdo, like-for-like growth was 5%, with strong growth in our industrial products of 13% like-for-like. Additionally, there were the headwinds from a soft electronics market, which is over 1/3 of revenue against strong comparatives, COVID lockdowns and the geopolitical backdrop and weakness in China. The region has been focusing on larger and more profitable customers, expanding the industrial product range with RS PRO growing 5% like-for-like. And we're developing a service solutions offer, which grew by 37% like-for-like aided by the acquisition of Domnick Hunter. Operating profit margins here grew 2.9 percentage points to 14.3% driven by price inflation and much greater cost control, including reorganizing freight and supply rates. So let's move on to our cash performance and our balance sheet strength, which is on Slide 14. We remain very cash generative, and we delivered GBP 264 million of adjusted free cash flow, over 90% adjusted operating cash flow conversion. And that includes an additional GBP 44 million of inventory investment reflecting our strong availability and the build-out of product in our extended DCs. Our balance sheet remains very strong. We spent GBP 234 million acquiring Risoul and Domnick Hunter during the year. And last month, we agreed to acquire Distrelec for GBP 323 million. Post Distrelec, our proforma net debt to adjusted EBITDA will still be under 1x. We have committed debt facilities of GBP 560 million at the 31st of March, which included a GBP 400 million sustainability-linked loan. And post the year-end, an additional EUR 150 million loan has been arranged for the acquisition of Distrelec. We have accelerated our growth through the acquisitions of Domnick Hunter in Thailand and Risoul in Mexico. They both expanded our product and service solutions offer and geographic coverage, and we're really pleased with early progress in pursuing revenue synergies and their trading performance. Since the year-end, we also agreed to acquire Distrelec, which operates in a very similar model to RS and significantly expands our Continental European presence, particularly in Germany, Switzerland and Sweden. We hope to complete that transaction by the end of July. Including Distrelec, we will have spent over GBP 550 million on acquisitions in the last 12 months or so. So on to Slide 16. We continue to outperform the industrial market, especially in EMEA, illustrating the strength of our more developed proposition. Trading over the last 7 weeks reflects a slowing in industrial growth indicated by PMI data and continued weakness and aggressive competition in electronics. Despite this more uncertain economic environment and the strong comparative period in the last year, we remain comfortable with current consensus profit expectations for 2024, although we do expect performance to be more weighted towards the second half. Now I'll turn back over to Simon.

Thanks, Jane. As you can see, she's been in the business a long time. So I suppose one of the advantages or possibly disadvantages of being a customer of RS for over 25 years, and a non-executive director for 6. As you become a Chief Executive, you enter the business with enough knowledge to be dangerous about the strategy, the senior leadership and the people. Now pleasingly, what I found is what I thought I knew and what I found is very closely aligned with why I took the job in the first place. There have been a few surprises here and I'm extremely excited by the role that I've been fortuned enough to step into. As this slide shows, we've got a solid business model that we're evolving, and we've got great people who, as you can see from the pictures of the tall individual on the bottom of the slide, I've been out and about meeting and actually losing at table football in one instance, but we'll sort that out Pete next time, won't we. We're very well positioned in fragmented and through-cycle growth markets. We have a pretty clear strategy where ESG is core and the breadth of the opportunity that our strategy is targeting is exciting. We have been and continue to invest in the long-term and sustainable future of RS, which is all focused on significant value creation for all RS stakeholders. Taking each of these points in turn in a bit more detail, I really like our solid business model and more importantly, where we're taking it. We're transitioning from a good, albeit traditional, digitally enabled distributor to an omnichannel high service products and solutions provider to industrial and MRO customers. We're increasingly purpose-led and digitally sophisticated and data rich. We're orientating ourselves more and more to our customers to understand their pain points and how we can best help them solve those pain points whilst continuing to support our suppliers' strategic needs. As a result, we're increasingly differentiated by our product and value-added service offering. And importantly, we've got a proven track record of delivery and outperformance. What I like best about our business, what I like best about what I've seen in RS is the passion and the energy and the commitment of our great people. We're really well placed in growth markets. I think the first 2 charts on this slide were shared with you at our investor event in March, 2022. And they're a bit of an eye chart there in your presentation. What they're really telling you is that we serve a number of different industries with a broad range of products across a number of specialist categories, all of which showed decent through-cycle growth over the next 5 years. We do need to improve our customer understanding and our customer segmentation and targeting as we build strategic as well as transactional relationships with them. But whatever work we do need to do around segmentation, our share of the products and the customers we serve with them is relatively small. What the chart on the right-hand side of the slide is trying to show is just what the potential opportunity is here. And the bar charts are percentage shares in the country markets in which we operate. And the bar on the left is our market share in the U.K. where our strategic positioning and our solution set is probably most developed. If you take that market share, which is just around about 4% and you apply it to all the other local markets in which we operate around the world, there's a GBP 15 billion opportunity for RS going forward even before those markets grow. And of course, whilst any of these markets are different, and there are different levels of maturity, and there are different product mixes and all that sort of stuff, I think this is very much an indication of the potential here. And importantly, our spread of product, customers and geographies means that we have excellent geographical and sector diversification. And we're pursuing a clear strategy to realize the exciting opportunities that our evolving business model and the attractive markets that we operate in has created, which we've tried to summarize on this page. And whilst it's a complicated diagram at the highest level, our strategy is pretty simple. I'd like you to follow the quadrants around the outside of the balls and wheels. Firstly, we want to build and increase scale because there's a minimum amount of physical and digital infrastructure needed to deliver the products and services to our customers that they demand. The more volume you put through this infrastructure, the more profitable you become, the better returns you can generate and the more effective you can be in supporting that customer. This means gaining critical mass, growing customer numbers and growing share of wallet in the markets that we target in which we play. Moving on to the next quadrant. To do this, we need excellent user experience that digitally increasingly mirrors their B2C experience as customers evolve the way they transact which coincidentally gets us closer to them and generates more data to allow us to improve our insights and our decision-making. Into the next quadrant, that means we will continue to move away from a purely transactional relationship with many of our customers to a much more strategic one, better understanding the issues that they face and using our data, our technical knowledge and our capabilities to provide more of the products they need when they need it and to develop solutions that they're prepared to pay for that address a number of their ongoing pain points and create product pull-through for us. And then in the last quadrant, of course, we need to do this and deliver a world-class and seamless customer and supplier experience and we need to continue to improve our underlying processes and our digital and physical infrastructure to ensure that we deliver operational excellence. It's a relatively simple summary of what we're trying to do, but it is absolutely focused on driving great value for creation for all of our stakeholders. But of course, the devil on executing this strategy is in the detail. And ESG is core to how we operate and to being first choice for all of our stakeholders. And I hope the quote on the top right-hand side of this slide from Siemens shows, we really take ESG seriously here. We have targets and actions to deliver them and we're making really good progress against our long-term ESG goals. But almost more importantly, not only is ESG core to what we do, but we're using our knowledge and our expertise to support our customers and suppliers in their own ESG journeys. For example, the Better World products that I referred to earlier, we've already introduced 20,000 into the U.K. and Ireland to provide customers with greener choices and we're aiming to extend this to over 100,000 by the end of 2025 and to make those products available globally. Although small for now, we're developing and deploying sustainability solutions using our technical product knowledge and data to help customers improve the operational efficiency and reduce the energy demands and carbon emissions in their facilities and in their supply chains. Supply chain optimization and enhanced digital basics that all great global businesses have such as clear empowerment, accountability and visibility, more consistent ways of working, more process focus and improvement, more transactional standardization and automation and, of course, world-class and agile tech and applications infrastructure. We've started a lot of this work but there is so much more we can do. We need to improve our focus on the things that matter. We need to be better aligned across the organization behind those things that matter so that we can identify and address resource strengths, constraints and interdependencies quickly and rapidly. We need to get better at prioritization, recognizing that whilst we have great people, there is only so much capacity for change that an organization can have. And finally, it's still less than 1 even after the 2x for the right sort of investment, dividend policy, and you saw Jane referred to the CNE need to change our clear approach to capital. So stepping back and trying to pull this all 6 weeks in this business, but actually 6 years in this business people. We're well positioned in attractive through-cycle strategy that has ESG at its core. We have '23, '24 in a really good place. Trading -- our growth in a continued difficult electronics market or even without the benefits of a couple of the tailwinds and a strong comparative period for last year, we're pretty comfortable in this year than it was last year. So against that better alignment, more prioritization and by driving more than support the medium term and through-cycle in Marh '22, which I've put on the right-hand side of this slide. Me personally, I think for the RS team, and also -- with that, I'm now going to open the floor for questions. We've got Kevin and Sophie who will be wondering around with mics. If you could raise your hand to ask a question, if you could state your name, the institution that you represent and then ask your question, we'll do all we can to answer it, but I'm going to sit down to do it, if that's okay.

It's David Brockton at Numis. May I ask 3 please? 2 on the sort of short term and then 1 on sort of strategy. Firstly, can you just touch on pricing and what you're seeing from an industry perspective and how you're responding to that? Secondly, in the Americas, you flagged that you saw customers overstocking through the first half. And clearly, you flagged that sort of the weakening trends through the final quarter. Can you just touch on -- do you have any indication or visibility as to how much more destocking that could be to come from that customer base? And then the final question, which is more strategic. You touched on quite a lot of levers for accelerating growth but also the sort of the requirement to be better at prioritizing. If there was one particular lever that you could draw out that you would see as having the biggest return for the business with, I guess, the least cost or risk, it would be great to hear.

Thanks, David. Three, really good questions. Pricing, I'll sort of take a headline, and then I'll pass it over to Jerry who'll pick some -- who'll pick that up. I think pricing that we're still seeing price inflation. I think clearly, we're selling inventory that is 6 months old. So there is a declining tailwind that might have been referred to in Jane's session. But electronics, in particular, remains highly competitive. A number of the supply chain constraints that existed through the tail end of 2022 and the first quarter of 2023 are going away. And that's certainly creating a more competitive electronics environment. But Jerry, I don't know if there's anything you want to add about what you're seeing in pricing?

Yes. So one of the advantages we do have as a business is the breadth of our categories. So in the electronics side, we're seeing a lot more deflationary pressures, right? And especially in semis and passives, whereas industrial, we're seeing less of that deflationary pressure. One of the things we do have as capabilities that we build in terms of pricing for the last 6-plus years is that we're able to identify changes a lot quicker and make changes on our systems from optimizing a price in line with competitive changes or making prices in line with what the customer expects from us. Now these capabilities vary from region to region. In the Americas, we're still building the capability. We're hoping to see some of that alive in the Americas this financial year.

Thanks, Jerry. I mean I think we're definitely seeing a different market dynamic in industrial than we're in electronics. Electronics is highly competitive. We don't see that same competitive environment nor I think do we really see the same stock build that's going on in the industrials and MRO space as there has been in electronics. And then that leads on to the destocking and the unwinding, I guess that's a challenging one because it's quite difficult to quantify how much these -- how much stock buildup there has been going on in the Americas, particularly. But I'll ask Doug to comment on that in a minute. But we're certainly expecting that specifically in the electronics space, it's going to be a relatively competitive year. Don't forget, we're not attempting to compete with the global commodity electronics producers. We absolutely are an electronic supplier. But to those -- supplying those components and products, mainly offboard that our key customers want and demand. And we won't chase pricing down. But Doug, is there anything you want to say about destocking and how you're feeling in the U.S.?

Yes. Just to reference last year and why it was such a powerful year for us. First, we have a strong field force out that can talk to our -- and helped our customers and some new customers find alternatives when they couldn't get stock. But we also serve the MRO market very strongly, but we also serve some OEMs that were very concerned about their security of supply. And they did overstock because the lead times got very long on several products. As we see that unwind a little bit with the supply chain, there's -- they have inventory that they burned off somewhat, frankly, we don't know exactly how much. And then there's some getting into the supply chain now, too. So -- but generally, they definitely over -- they bought to ensure that supply both for their maintenance and for their production. And it's slowly unwinding, but we do have -- now the supply chain is loosening up and the lead times are shortening. And so they're naturally saying, I don't need to buy as much.

Thanks, Doug. And then your last question, David, sort of levers. I mean, there is a huge amount of opportunity in RS. The one thing that I think will improve and accelerate our realization of those opportunities if we get better at executing. So I think there are so -- there is so much going on in the group and it's really why I alluded to, we need to focus on the things that matter and then execute them brilliantly. Just improving that execution, we'll make a huge difference in RS. It's not that we aren't executing, we could just execute better. Thanks, David.

It's James Rose from Barclays. I've got 2, please. The first is on the profit bridge. Could you talk us through the various moving parts of how we get from GBP 402 million this year to the GBP 390 million of consensus you referenced. I mean we've got M&As to factor in, FX is a slight drag, gross margin being perhaps one-off in there and then assuming some organic decline as well, if you could go through those moving parts, that would be helpful. And then secondly, in the Americas, could you talk about how you position that business to be a more industrial MRO-focused one from Allied Electronics as it once was without causing more confusion or disruption to your customer?

Jane?

Yes.

Fancy having a go at profit bridge?

Yes. I mean I think you kind of called out that -- the component parts. So we did have some strong in the prior year. So there's some upside from pricing and particularly in our electronics conditions that we've just talked about. And that's representing both our revenue and our margin. So we would have been able to move more inventory that we perhaps have bought previously during the last year when supply chains were constrained, you definitely see some positive impact in the prior year from that. And also we've got some one-off costs, which we've called out in the prior year. And then moving forward into the prior year -- into the current year, we had a very strong half 1 last year. Clearly, conditions are different now. So we'd expect to see half 1 much more difficult than half 2, as we've alluded to. We've clearly got our acquisitions, which are going to give us some PBT and profit benefit. So you've kind of called out all the component parts and the numbers are on slide.

Yes. I think what's definitely true, James, is that in '23, we did take the opportunity to benefit from positive markets created by supply constraints in the first half. I think that's very much a tailwind when you think that with an average inventory turn of sort of 2.6, 2.7x and underlying price inflation running at 10% or 11%, there is a chunk of additional profit that you generate. And that's certainly a good chunk of the bridge. And then we're sort of -- we're offsetting that with a chunk of inorganic contribution next year. So I think broadly, if you think about it, it feels like a flat to mildly up revenue and a normalized flat profit, sort of that's how it feels. Americas, just remind me what the question -- how do we transition it. Yes, look, -- and Americas is sort of a macrocosm of a lot of our individual country markets. We have quite a spread of different customer types. And therefore, the products and services that we provide them with is quite widely spread. In all of those country markets of which we include America, we're migrating from that existing customer base, whatever it looks like to becoming an increasingly close strategic supplier to those and broader customers. How we're doing that? We're getting closer to them. We're providing with value-added services that they need and that provide product pull-through from our broader and broadening product range. It doesn't happen overnight, but it is the journey that our strategy has us on and that we'll continue to execute effectively. Does that help? I think a little bit has been made of the rebranding. I think part of the rebranding in the Americas is to exactly demonstrate and flag that strategic direction of travel. It doesn't mean that we're not going to be a big A&C supplier in North America for as long as I'm here and well beyond. It does mean that we're expanding what we do for those A&C customers and introducing more and more different customer types that we can provide service and product solutions to. Thank you.

This is Anvesh Agrawal from Morgan Stanley. Two questions. First, in the statement, you flagged some whether there is an increase in provision this year, and some of that is tied down to electronics business. And then you mentioned in your comments that the pricing is quite aggressive and you're not sort of playing the volume game. My question is why won't you do that in this market? Because pricing is what it is. And instead of sort of taking up the provision, why just sort of don't chase the volume here? And the second question is just sort of maintenance. What are you assuming for the strategic investment and employment incentives for FY '24?

So Jane will answer the specifics of provision, but please don't misunderstand us. We're all about long-term value creation. And if market prices move, we'll move our prices on those products, we believe we need to move our prices on. But the increase in provision, Jane?

Yes. So the inventory provision, yes, so predominantly around electronics and of course, we talked about OKdo. So there was some increase in our provisioning position in the year. We did have, in the prior year, also a kind of an opposite with us being able to sell inventory that we previously provided, given the supply constraints, you've kind of got a bit of a -- not quite an offset from that situation, which indicate some of that increase, but it's predominantly electronics and OKdo, which is just driving that additional -- it's just about the aging profile of our stock and the minimal amount of quantities from our inventory investment point of view.

I mean it's generally math. We have an inventory provisioning policy that's driven by the size of the inventory, the age of that inventory. We obviously make interventions where we do. But actually, if you see our inventory go up, you'll see our inventory provision go up. It doesn't mean we don't think that, that stock is good or sellable. It's just the way the math works. And then just on continuing strategic investments in 2024, I think we called out GBP 20 million or something of strategic operating profit -- strategic operating costs that we've put into the business in '23. I think you should anticipate that continuing in 2024. And then Jane has given guidance on capital investment and all that sort of stuff. So I don't think you'll see any big change in that level of ongoing operating cost investment in improving the business and pulling those growth levers. Thank you.

It's Kean Marden from Jefferies. Sorry to come back on the inventory point, but some -- so there's a GBP 33 million write-down that you mentioned in the notes. Is that included in the 90 basis points gross margin tailwinds that you flagged for the fiscal '23 year? So effectively, there's a net effect of 90, but it includes a headwind from the GBP 33 million write-down. And if it's all electronics, and electronics is about 1/4 of your business and therefore, presumably about 1/4 of cost of sales. Would that sort of imply that you've written down something in the region of 7% to 8% of the inventory that you've got in your electronics business? And then a couple of other quick questions. On RS PRO, forgive me, the data and the notes is slightly different to how you presented it on Slide 7. But it would appear that the U.S. RS PRO revenue hasn't really increased substantially over the last 6 to 12 months, but we can see that you're putting a lot of investment into the SKU count. In that business, just wondering how to reconcile those? And then finally, I guess the external perception of RS at the moment is that there's quite a lot of change internally, how would you assess operational execution over the last sort of 6 months? Do you perceive any disruption in the U.S. or in Europe?

So I'm going to do the terrible thing of a Chief Executive trying to pretend to be an accountant for 2 seconds, and then I'm going to let Jane educate you properly. But just a couple of things on that inventory provision. It's not a write-off, it's a provision, right? So importantly, you need to understand that even though it's provisioned and as Jane alluded to, in '23, we actually will sell stuff that has been provisioned and realized super profits on that. And a little bit of that's what was going on in '23. Have I just misled everybody?

No. It's totally aligned. By the way, totally aligned.

And there is some other stuff in there where -- so we do have an inventory provisioning policy that is just maths based on aging and the amount of inventory we carry. We then will make...

The half weighting, is it just a recovery in the destocking that comes back, assumptions you have in that guidance? Second one is on costs. What -- how much is your cost base growing that you've exited at a low growth. And then the final question is on integrated supply. We haven't talked about it much today. But in the past, is that a part of the bridge this year, next year? And if so, could you quantify it?

So just first half, second half weighting that significant growth in a softening industrial and competitive -- I do think we're planning for a slower growth year and a more competitive electronics environment year. But of course, we're only running the business according to those assumptions. We've got lots of -- the market turns out to be different to that we're anticipating. But just math says that I don't think it assumes a massive recovery in market in H2. Cost inflation, Jane?

Yes. So I mean we said in the presentation, the cost inflation running at mid-single digits and we're continuing to obviously put investment into the business, and we've indicated kind of similar levels to prior year from a strategic investment point of view. There's some input -- some modest input price inflation. Our energy costs, we're expecting, we're coming off some hedging. So we're expecting those to [ bubble up ] a little's bit. But transport inflation is easing. I think the key on cost is that we don't want to make decisions which short term our organization. So it's really important that we get that balance right between delivering performance today but also setting ourselves up for future success. And that is a balance we will continue to keep in check all the way through the year. We're only 7 weeks into this year. So we're not going to make any big decisions based on that. We're going to continue to monitor performance and manage the cost base accordingly.

I think in overview, we're assuming a sort of a mid-single-digit input cost inflation during the course of the year. But to Jane's point, there's lots of levers we can pull in this business, but we're in it for long-term value creation and balancing those short-term and long-term pressures is what RS has been very good at in the past and will continue to be fantastic at going forward. I suppose the last thing on integrated supply is just one of a very large number of value-added services we have across the group. We're making good progress in our integrated supply, but it's not enough to move the needle or to pull out on the bridge. But we're pleased with the progress those guys are making but there's a long way to go on creating a more scalable solution in integrated supply, particularly in Europe, but we've made a good start. You got last question, you're head of IR.

I've got 2 questions from the web. Not mine. So first question, in Q4, talked about short-term disruption to the digital's organic search revenue flagged due to the Allied rebranding. So how is that picture evolved? And has there been any improvement in the traction of the RS brand over recent weeks?

Doug, do you want to take that one?

So with the rebrand after so many years as Allied and a rebrand RS, we expected search engine optimization issues, things like that and invested in to address those. And we have -- we did see a dip as Google and some others crawled our website and reindexed it. And so we did see a drop. But we've reinvested more in that and gotten that back and also the actual buy rate also rebounded a little bit over the last couple of weeks as well. So we're back on track, but we had to make investments and we expected that. It came at a time when there was also some softness in the market. So it's hard to tell exactly how much it was, but we have made the right investments and have gotten the rebound on that.

Thanks. I mean -- I think I've heard a couple of people say, well, why on earth did you rebrand? We needed to rebrand because we're evolving our offering in the States. We're not just electronic supplier. I think we planned well for a lot of the disruption that goes with rebranding. I think they were at the margin, a couple of things, particularly where you have agreed supplier by lists where they cease to be able to match a company name and a company number where we probably had to do a little bit more work than we thought we had but it's not a major needle mover. And I think we're through whatever that branding issue was going into 2024.

Second question online is on competition. So it says that aggressive competition was flagged in the outlook statement and in the Americas, and the press release talked about competitive pricing in electronics. Can you add a little bit more detail to the points, please? Where is the aggressive pricing coming from? And given RS' differentiation as traditionally the availability of product rather than price, Why is this now a problem in the U.S.?

I think we've touched on all this in the answers to a couple of questions. The pricing competition or the more competitive environment, we're flagging is solely in electronics. And those of you that have been watching this business and indeed the other big electronics distributors around the world will understand the supply and demand electronic cycle that exists and we're in it. As I think you heard earlier from Jerry, we have much greater flexibility now to move our prices but only on the right products and when we need to move them. We care about long-term and sustainable value creation here. We won't chase commodity pricing down, but we'll protect that product and that share where it's a differentiated offer and a premium offer for our customers.

Another question, what are the financial hurdles for M&A, please?

So I don't think we do other than tell you that the returns from the investment need to exceed our cost of capital at the end of year 3. Just so perhaps people can understand all our investments, whether M&A or otherwise, we look at risk-adjusted cash flows, and we discount those cash flows. We don't care about multiples in all this. This is an outcome of the fundamental valuation work that we do. So we have pretty rigorous financial criteria for any investments, including M&A, but also we need to understand culturally the fit and in M&A, strategically, it has to accelerate strategy realization. So there are a number of hurdles, not just financial hurdles that we go through. And I'm very comfortable with the M&A process and the evaluation process that we've been through. And as you can imagine, a Chief Executive, who's only been in role for 2.5 weeks has a pretty close look at a GBP 300-odd million acquisition, and I was very pleased and impressed by what I saw both in terms of analytics, in terms of the construction and risk adjustment of the cash flows associated with those acquisitions and the combination with our own business and also the integration planning. So I think with that, getting you away a couple of minutes late. Thanks very much for all your attention and for your interest in RS. We look forward to seeing you, if not before, at our interims whenever that is, September time. Thanks very much.