RS Group plc (RS1) Earnings Call Transcript & Summary

Well, the clock says it's 9:00. So good morning, everybody and welcome to the RS full year results presentation for the 12-month period ended 31st of March 2025. Thank you for joining us here today. Thank you for joining us online and thank you all for your continuing interest in the RS Group. I'm pleased to report that 12 months into our quite ambitious multiyear plan to enhance and improve RS, we're making really good underlying progress in all areas of our business and we'll highlight that as we go through the course of the presentation today. Although the unwinding of postpandemic trading benefits and the challenging macro environment continues to impact our financials and to slightly mask the sustainable and underlying improvements that are going on and are in train across the group. However, by focusing on the things that we can influence and executing well to our plan, we are now in much more control of our own destiny as we continue to position ourselves effectively for the acceleration as markets recover and we returned to more sustained growth. And so on to the presentation itself. I'm going to share some detail on what we've done this year. Kate will then take us through how this has been reflected in our numbers and our regional performance. And then I'll wrap up by sharing what we are focusing on going into 2026. And our presentation should take around 35 minutes but we'll leave plenty of time for questions at the end and we'll aim to get you all away by 10:00. Now as you know, at RS, we like to start all meetings with a health and safety in [ a values ] moment. And so first, I'd like to point out the fire exits to those that are here in the room, back corner. There are no planned fire alarms. So please, if you hear one, leave in an orderly fashion and follow the instructions of the fire marshals who will be wearing hi-vis vests. But at RS, safety isn't just about physical well-being, it's about mental well-being, too. And that's why to mark World Mental Health Awareness Month, nearly 200 of us at RS around the world joined our LifeWorks Employee Resource Group initiative, Move for Mental Health. The object is simple but powerful. We're going to walk to raise awareness of mental health in the workplace and of course, moving also is good for our own physical and mental well-being. We started with an ambition to walk collectively a kilometer in May for every colleague statistically likely to be impacted by mental health during their working lives. We passed that goal of 4,350 kilometers by week 2. And so we've extended it. And I fully expect the 200 of us to walk over 10,000 kilometers this month, each kilometer a message of awareness and support. And this is an example of what RS is all about. It's our values in action. It's one team doing the right thing by coming together to raise awareness and make every day better for ourselves and for each other. So into the presentation itself. Fiscal year '25 was a year of significant underlying progress at RS, where thanks to the continuing efforts of our great people, we delivered a pretty resilient and in-line performance. We are executing against our plan effectively with clear prioritization, improved accountability, enhanced agility and as a result, much improved delivery. We're performing as we should, delivering more predictable outcomes even in difficult markets and continuing to take market share. We're managing the things that we can control better, taking action early, delivering restructuring and integration benefits ahead of plan, improving efficiency and managing costs appropriately. And we are beginning to see the benefits in our underlying operating metrics of our continued strategic investments and all of which gives us great confidence in our ability to drive stronger growth and operating leverage, which in turn will generate significant value for all of our stakeholders over time. And we've done all this and made all this progress despite the difficult market backdrop that we've operated in. Now expanding on each of these themes in turn. As this slide suggests, we're executing more extensively because of the extensive changes that we've made here over the last 2 years. We've now got a strong, diverse and stable leadership team with enhanced capabilities and a breadth of experience and most importantly, a common set of aligned objectives. The second block, as set out in our Capital Markets Day in September, we've got a clear and focused strategy and an integrated and multiyear action plan to deliver it with much more systematic and rigorous resource and people prioritization. We've implemented changes to our operating model and the ways of working to create clearer accountability and to support better execution. And we're more process-focused and that's highlighting opportunities to harmonize, automate and improve delivery through more rigorous program and change management. And importantly, we're actively monitoring progress with much more effective management oversight, all of which is driving clear prioritization, that enhanced accountability that I referred to and much better visibility, agility and ultimately, delivery. This year, we performed much more as we should. As the chart on the left-hand side, here shows. It's one we published before. It plots our like-for-like revenue growth, the red line against the RS weighted market, PMI, which are the gray bars. It shows that the postpandemic, mainly electronics trading benefit that we saw from the second half of our financial year in 2021 had broadly unwound by the first half of 2024. And it also shows that PMI data throughout this period has been below 50 and certainly has been in decline since Q2 2023. And despite this, our revenue performance this year returned to its more close correlation with PMI and has even started to outperform in the second and third -- in the third and fourth quarter of this year, despite actually PMI softening a little and this reflects some of our strategic initiatives beginning to deliver. And whilst it's difficult to measure market growth and share in the high service distribution space, the proxies that we use, which tell us we're continuing to gain share, such as supplier support -- supplier reported channel relative and absolute growth and web inquiries, all indicate that we are performing better than the market. And now and most importantly, we are performing predictably. And part of this is because in '25, we were much more effective at managing the things what we control. As you'll hear from Kate shortly, our growth accelerators continued to outperform the broader group. We're managing our variable and fixed costs better, exceeding our expectations on restructuring benefits and taking additional in-year action to reflect a more difficult than anticipated trading environment. And our -- actually our headcount reduced by over 4% during the year. And although we increased strategic investment to GBP 31 million this year, we did actually defer and reprioritize nearly GBP 9 million of strategic investment to later years and Kate will expand on both these things in her section. We accelerated delivery of integration benefits commencing the early exit of our distribution center in the Netherlands, originally operated by Distrelec and this will generate significant additional cost savings in future years. And we're driving greater efficiency through reducing complexity, removing duplication and this will continue as we improve collaboration and begin to harmonize our processes. And finally and importantly, much more focused balance sheet management has led to over GBP 200 million of free cash flow this year, strong cash conversion. And as a result, leverage remains towards the bottom end of our target range. And all of this demonstrates that we are able to exercise greater agility in our execution, investment and cost management. And on this chart, we're just showing you where the focus of our GBP 31 million of organic OpEx this year and our GBP 35 million of related CapEx has been sent -- has been spent. And the light red is the capital expenditure and the darker red is the OpEx. And in customers, we got cleansed a much more granular data and have rolled out improved tools to enhance our customer understanding. In products and suppliers, we've launched major systems improvements to accelerate new product introduction. In solutions, we've replatformed and upgraded our principal digital procurement solution and we've enhanced our service offerings. In customer experience, we've developed an upgraded digital platform for rollout across the group and launched an extensive systems upgrade that will ultimately allow real-time delivery tracking. And in operational excellence, we continue to integrate Distrelec into RS at an accelerated pace, whilst better leveraging automation and our global shared business services capability to optimize our operating cost. And all of this highlights the significant strategic and operational progress that we've made this year. And with that, I'm going to hand over to Kate, who's going to share with you how this has all been reflected in our numbers.

Thank you, Simon. Good morning, everyone. I've seen significant improvement in RS and a greater understanding of our strategic direction, analyzing our commercial KPIs better and what levers we need to pull to optimize our performance and how to respond to external factors. We've navigated the difficult market well, while executing better and staying focused on what we can control, building the foundations to take the opportunity to benefit from greater operating leverage as market conditions improve. So let's move on to what's behind the numbers. This slide summarizes the results for the 12 months to 31 March '25. Year-on-year revenue decreased by 1% and that's 2% on a like-for-like basis, having adjusted for acquisitions, trading days and FX. Trading was slightly stronger in the second half in Americas and Asia Pacific as the PMI has improved and we traded against weaker comparators. Our adjusted profit before tax reflects the market backdrop and our actions taken on normalized costs which have offset inflation as well as the increase in organic investment. Adjusted operating cash flow conversion has been very strong at over 110% as we released working capital in the year through improved working capital management. Our ROCE decline reflects an 80 basis point impact from last year's acquisitions with the remainder due to lower profit, partially offset by reduced capital employment. And our full year dividend increases by 2% to 22.4p per share, consistent with the progressive dividend policy. Our digital like-for-like performance of negative 2% largely reflects the market decline. And as Simon mentioned, we can see material declines in online footfall for some of the key words we're bidding for, albeit our conversion rates are improving following our search tool investment. The majority of the digital revenue decline is in web sales and that's to medium and smaller customers. Services solutions revenue grew by 6% like-for-like as we have had success in targeting high-value corporate customers who are increasingly using our digital procurement solutions, which grew by 4%. We have restructured our business model for RS integrated supply, improving the commercial offer and we're pleased with the progress that the team is making with new profitable contract wins, improved contract management and a doubling of the order book. I'm also pleased with the performance of our own brand, RS PRO, which grew 2% due to range development and end-to-end sales and marketing focus. RS PRO now accounts for 14% of group revenue. Before I leave this page, you will also have noticed our full year '23 and '24 inventory provisions have been restated for an adjustment in the U.S. to reflect the correct application of the group inventory provisioning policy. This is further detailed in Note 12 of the RNS but there is no effect on our full year '25 numbers. All right. Let's turn to revenue. Group revenue was broadly flat, with like-for-like revenue declined 2%, largely due to lower volumes with minimal price inflation. There was a full year benefit from last year's acquisitions, Distrelec and Trident and a ForEx impact from the stronger dollar. Average order value declined slightly whilst average order frequency increased marginally. And then our 3 product categories, Facilities & Maintenance and Other industrial categories grew 3%, Automation & Control, Electrification and Test & Measurement fell 2% and these 2 categories cover around 80% of our group revenue. Our weakest categories in semis and passives, cables and connectors, which declined 8%, reflecting weak end markets. We have been active in managing our cost base. And as you've heard from Simon earlier, we exceeded our expectations on restructuring and integration benefits. And this, in part, offset inflation and normalization of incentives. We took additional short-term cost action recognizing a difficult trading environment. I've updated the cost bridge that I've shown you in previous session so that you can follow the change in the OpEx over the year. So that we can all align on a good starting point, I've rebased '23, '24 OpEx to exclude the GBP 13 million cost to achieve last year's benefits, which, as a reminder, we show above the line. That gives us a baseline starting point of GBP 939 million. As we step through the chart from left to right, we include the full year impact of acquisitions, small single-digit increase in inflation and normalization of employee incentives. We've increased our organic investment by GBP 7 million to GBP 31 million, which is GBP 9 million below our original expectations and that's because we optimized our pace and our sequencing of our investment spend appropriately. This leads to a cost base of GBP 994 million before management cost savings. We executed the integration and restructuring plans to generate another GBP 29 million of ongoing cost savings by removing labor and facility duplication. This cost GBP 17 million, which is a payback well below 12 months. We've also delivered over GBP 38 million of cost savings over -- sorry, we have now delivered over GBP 38 million of cost savings over 2 years, which is above our GBP 30 million target. And this leaves us with an ongoing cost base before in-year one-offs of GBP 965 million. During the year, we identified a further GBP 13 million of one-off savings, including the early termination of a lease agreement in the first half, general belt tightening in spending and delaying vacancies. The GBP 17 million, which I referred to above of restructuring and integration costs, which we incurred in-year were again recorded above the line. So our operating costs, including one-off costs and benefits, finished the year at GBP 969 million. Right. So let's bring this all together. Our adjusted operating profit margin reduced by 100 basis points to 9.4%. The most significant movement in that being inflation in the cost base given there is little revenue and COGS inflation during the year in gross profit. Let's move on to our regions, starting with EMEA. Total revenue declined by 1%, including an extra quarter contribution from Distrelec. Like-for-like revenue declined 3% with weak industrial production output and ongoing economic weakness across the region. And within the region, we saw France outperform helped by more resilient industry verticals, the U.K. suffered from weaker demand since November and Germany be impacted by a higher exposure to manufacturing and automotive industries. In Americas, our total revenue fell 3%, which is largely a result of the weak dollar during the year with like-for-like revenue flat. Economic weakness in the U.S. and Canada through most of the year impacted business confidence as evidenced by the weaker PMI data, although this showed some signs of improvement in the fourth quarter. Our operations in Mexico performed well as we expanded our product and service offer against a strong economic backdrop. Like-for-like gross margin was down just 0.1 percentage point and the 4% decline in like-for-like operating profit reflects the revenue decline and increased organic investment, including within Mexico, which was partially offset by operating cost discipline. Moving on to Asia Pacific. Total revenue grew 2% with like-for-like flat. We saw improving momentum during the year with like-for-like growth in the second half, reflecting signs of market recovery, especially in Southeast Asia. We have been developing our industrial offer, focusing on high lifetime value customers and expanding our service solutions offer, helped by the acquisitions of Domnick Hunter and Trident. And we're pleased with the success that we're having with RS PRO in the region. Operating profit increased by GBP 1 million, with evidence of improved operating leverage emerging. I am pleased to report strong free cash flow with an operating cash flow conversion of over 110%. The lower EBITDA was partly offset by an improvement in working capital with better working capital management, especially in receivables. Capital expenditure remained stable at 1.2x depreciation and supports our organic investments and strategy, notably physical and system infrastructure. Net debt decreased to GBP 364 million, resulting in a gearing ratio of 1.1x, which gives us good headroom to consider inorganic opportunities. And our cash generation, balance sheet and debt facility headroom provide plenty of capacity for continued strategic investment. And our clear capital allocation policy hasn't changed. First, we prioritize organic investment to support organic growth, especially in strengthening our physical system and process infrastructure and this will increase next year and continue at around about GBP 35 million to GBP 45 million, as previously signaled. Second, acquisitions in this globally fragmented market can accelerate our strategy, especially small bolt-ons. We remain value and capacity disciplined in our approach, assessing and building a pipeline of acquisitions, which are executed or targeted to cover our cost of capital within 3 years. And third, we believe in sharing cash generated with shareholders through a progressive dividend policy and where we don't have sufficient value creation opportunities in organic and inorganic investments, we will return excess capital to shareholders. Our full year dividend in '24/'25 grew by 2%. We expect future increases to continue to be in the low single digits until dividend cover is rebuilt. We target return on capital employed of over 20% and leverage an efficient balance sheet within a range of 1 to 2x net debt adjusted EBITDA, depending on prevailing market conditions and acquisition opportunity. Right, finally, to give you some help on factors to consider when you're thinking about full year '26. We believe that the work we're doing to improve the operating performance of RS puts us in a strong position to drive greater operating leverage when the markets return to growth. We are planning for gross margin to be broadly flat with pricing discipline maintained, whilst recognizing gross margin can be impacted short term by a variety of factors, including ForEx and inflation. We plan to increase our spend on organic investment next year to within the lower end of the guided range of GBP 35 million to GBP 45 million per annum. And we anticipate similar cost inflation to that seen in full year '25 of 3%, including higher labor costs and additional U.K. national insurance costs. We announced a further GBP 30 million cost -- we announced a GBP 30 million cost savings program, which is now complete and a further 150 basis points of margin improvement through cost savings over the medium term. I approximate that to be around about GBP 45 million of cost and we're making inroads into that target and we'll continue to do so in full year '26. We expect during this coming year that further cost efficiencies, combined with cost synergies delivered from integrating Distrelec will deliver at least a further GBP 15 million of cost benefit. The associated cost to deliver these benefits will be in the region of GBP 10 million to GBP 15 million. Higher depreciation from our capital investment spend and further normalization of our employee incentives will be about GBP 5 million to GBP 10 million of increase. We are proactively managing costs and have demonstrated our ability to flex expenditure as required. Remember, as shown on our cost bridge slide on Slide 11 that our underlying cost base for '24, '25 was GBP 965 million, stripping out one-off cost benefits and expenditure. We'll continue to target cash conversion to exceed 80%. There is no change to our capital expenditure guidance at around GBP 50 million and we continue to support the physical and system infrastructure investment with our CapEx, including progress on the 2030 ESG action plan. Guidance points, which include trading days and ForEx, unchanged tax rate and a summary of the operating cost actions is included on Slide 34 of your pack. And with a final word on tariffs. We are not currently experiencing any visible direct impact from tariffs and we're closely monitoring this evolving situation. We're fully engaged with our suppliers on their response and to support our customers in meeting their needs. And we would expect to pass on any price increases as suppliers adjust and we have the system capability to manage those changes. Given our global reach, broad product offer, wider supply base and supply chain management expertise, we have the opportunity to offer alternative products, manage supply disruption and minimize our direct and indirect exposure to tariffs where necessary, whilst mindful of the impact of tariffs that it may have more broadly on PMIs and the macro environment. I'd like to now hand you back to Simon.

Thanks, Kate. And now in this last section, I'd just like to share with you a bit more detail on the significant progress that we're making against our strategic action plan, where we're focusing on going into 2026 and where we are in our broader strategic and operational improvement journey. So this is a slide some of you will recognize from our Capital Markets Day in September and it's our pictorial plan on a page. It's how we intend to become first choice for customers. First choice for suppliers and how we will accelerate sustainable value for creation for all of our stakeholders. So what have we done and what are we planning to do? At the core of our wheel, core to everything we do is people. And for people, for us, it's all about further aligning and developing our people and leadership capability and capacity. Our people actions in 2025 led to greater focus and empowerment, more accountability and responsibility. And we did see a small drop in our October engagement survey, although it's perhaps -- it remains at high levels and it's perhaps not surprising given the difficult market environment in which we've been working and the level of change going on at RS. But pleasingly, our most recent survey, which is just coming to a close now, is showing significant improvement in engagement in all areas. So in 2026, we'll be focusing on equipping our leaders with greater agility and flexibility to better manage and lead continuous change and moving to a more skills-based organization, particularly in key functional areas like finance, product and supply chain and people as we continue to build a greater organizational agility, efficiency and competence to support our strategic opportunity. In customers, it's all about prioritizing the most valuable ones whilst continuing to serve all who buy a broad mix of industrial MRO products in small volumes but doing so in more effective -- in a more effective cost to serve. In '25, we aggregated and cleansed our customer data and enhanced our data capture mechanisms and put in place the tools to enable us to develop much more targeted sales approaches and to clarify those costs to serve. We defined and put in place standardized and forward-looking operational metrics to monitor our progress. And as we move into 2026, we will start to use this data and advanced segmentation capability to provide much more tailored and effective sales, service and marketing efforts to our customer base. We'll also be using our improved digital flexibility to optimize our digital front end in markets where there are significant cultural variations such as China. And all of this allows us to better prioritize the right customers with the right products and the right services efficiently and at an effective cost to serve, all enabled through the use of proprietary data and enhanced data platforms. In products and supplies, it's about strengthening our technical product offer through value-sharing partnerships with strong suppliers and by developing more curation for our customers. In '25, we made material changes to our systems to allow increased local sourcing and stocking and introduced a new product management capability to materially accelerate both our capacity for new product introduction and our speed of adoption, whilst migrating sourcing to improve sustainability and stability of our supply chain and this is particularly true in RS PRO. And moving into 26, our focus is on optimizing our product management systems to accelerate the availability of relevant technical data and improve our customer experience, building out further our RS PRO range and upgrading our pricing capability and processes to make us more effective value-based prices. And all of this is creating greater flexibility and allow better sharing of the value we create for both suppliers and customers. We're continuing to focus our solutions and service offer. During the year, we replatformed our e-procurement offer in Americas and Asia Pacific, enhancing content and order processing with new software planning tools. As you heard from Katie earlier, under new management, we've also refocused the RS integrated supply business to drive standardization and automation, which will lead to greater cost efficiencies and better scalability. And as we enter 2026, we'll continue to develop our digital product solutions, our technical solutions and to leverage closer relationships between our integrated supply business and the broader RS as we pursue greater scalability and enhance value through our solutions and our services. And we continue to strengthen and tailor our customer journey for a seamless omnichannel customer experience. In '25, as you heard from Kate, we've introduced a major artificial intelligence-enabled enhanced search capability across the group and commenced the development of a major upgrade to our digital commerce platforms, with [indiscernible] actually launched in Americas just after the year-end. We've also launched an extensive systems upgrade in EMEA and APAC. That will, whilst causing some initial disruption, ultimately allow us to deliver real-time delivery tracking to our customers. And going into 2026, we'll be further enhancing our digital commerce platform and begin rolling it out in Europe. And we'll also launch the real-time tracking functionality to customers that we've done all the base work to enable and start to better tailor our customer experience using, again, our extensive proprietary data that's all enhanced by artificial intelligence and machine learning enabled platforms. And of course, we're improving our physical, digital and process infrastructure to make it more efficient, more agile and more scalable to better support our strategic direction of travel and ultimately, to improve our operating leverage. In '25, we made really good progress in a number of areas. In addition to commencing the closure of the Distrelec central distribution center, we've also expanded our capacity and capability in our DCs in both France and in the U.S. And we've begun the simplification and upgrading of our technology stack, retiring over 40 applications during the year and we've now commenced our middle and back-office transformation planning. In '26, our focus will be on continuing the exit from Distrelec CDC and upgrading our warehouse management systems in the U.K. and continuing to selectively invest and automate our distribution infrastructure in Europe. We will also commence the final phase of the Distrelec integration and start decommissioning the Distrelec technology stack. And on the process side, global end-to-end process owners will be defining harmonized processes for application across the group and we'll begin driving standardization where it makes sense. And we're well into the next phase of operational improvement work at RS, which will further increase efficiency, reduce cost and ultimately support accelerated growth and much improved operating leverage. So bringing this all back together. We're 12 months into our ambitious multiyear plan to enhance and improve this group and we continue to invest despite the tough markets that we've seen this year. This chart reflects the progress we're making and the increased confidence we have in the plan as we execute it. The chart on the left-hand side of the page is a repeat of what you saw, which allocates the OpEx and the CapEx that we'll be spending over the next 4 years through the areas in which we'll be driving improvement. And remember, Kate referred to that GBP 35 million to GBP 45 million of elevated OpEx or so that we'll incur. And this will drive at least a further GBP 45 million of efficiencies and cost reductions. And then the chart on the right-hand side is a directionally correct representation of how these costs and these benefits are expected to come through over the next 4 years. And as you can see from the chart, we are beginning to build real momentum going into next year. We will, of course, continue to be agile in our cost management as we've demonstrated this year. But with benefits already beginning to come through in our operational performance, we do have increased confidence that these investments will drive accelerated and long-term value creation. And as we enter 2026, markets remain challenging with Americas and Asia Pacific probably more resilient than EMEA and particularly in the U.K. as you will have noted from the PMIs. However, we may remain confident that once PMIs recover structural industry trends will return our markets to growth. And therefore, whilst we'll flex effectively, as we've demonstrated this year, we will continue to execute our improvement plan to drive and improve the quality of RS and to position us best for accelerated growth, to realize the significant value opportunity that exists here, from being uniquely placed in fragmented markets and well positioned for when they return to growth, which they will, through driving market share gains through a differentiated and increasingly differentiated technical and digital product and service solutions offer, through improving and continuing to improve the efficiency of our global infrastructure to enhance that operating leverage and enhancing it all with disciplined acquisitions that accelerate growth and value creation. And as we do that, we will increasingly become sustainably first choice and drive sustainable value creation for all of our stakeholders. And to conclude, I am extremely proud and hugely grateful of the efforts of our great people who continue to embrace the changes that we're making and are working extremely hard to deliver them. This stuff isn't easy and it can be frustrating, particularly when difficult markets mean that you can't immediately see the benefits of all your hard work in the headline financials. But thanks to the efforts of the RS team, we are making real and significant underlying strategic and operational progress. And this is giving us increased confidence in our ability to deliver on those medium-term objectives that we've set out for you in the past, growing at twice the market with mid-teens adjusted operating margins, generating over 80% cash flow conversion and delivering returns on capital well in excess of 20%. That gives us -- that brings us to the end of the formal presentation. I'm going to open up the meeting to questions. We'll take questions in the room first, if that's okay. There are a couple of people with mics. If you can raise your hand, state your name and the institution that you represent. We'll take questions. And we'll also then take any questions submitted. So give me 2 seconds to go and sit down, then stick your hand up and...

It's David Brockton from Deutsche Numis. Can I ask 2 questions in relation to tariffs, please? Thanks for setting out the minimal direct imports that you think -- feel the business has into the U.S. I guess that was somewhat contrary to my prior view of -- I thought it was minimal from China. I'm just wondering if you can just give us a rough split of the proportion of products that are sourced from Europe and the U.K. as well as China into the U.S. if you're able to or any sort of directional indication there? And then secondly, in relation to tariffs, it's very encouraging that the business has seen improved performance through Q3 and Q4. And I think you noted that it was ahead of PMIs due to the sort of strategic initiatives that are coming through. Have you ruled out any pull forward of orders ahead of tariffs in those numbers? I'm just wondering what you're seeing on the ground level there?

Thanks, David. I'm going to give Kate a bit of time just to check the origin data for our Americas business. But the reason that you see relatively little direct import into America is, a lot of our suppliers will import from where it's manufactured into their own stock center -- the stock holding center in America, and they will ship from that to us. So we're generally [indiscernible] about 5% of our America -- North American revenue is actually tariffed but quite a lot of it comes from all sorts of different places. Have you managed to dig debt number out, yet?

Yes. I mean when we're looking at country of origin, bearing in mind that this is a country of origin into the U.S., not necessarily directly to us, if that makes sense. So in terms of China, it's about 34% is country of origin. Then we've got sort of Germany and Europe and the rest of Europe at about 40% combined. And then it's a range of other places after that.

So do we see any evidence that tariffs are driving accelerated growth and pull forward? We don't see any of that directly, David. But perhaps that's in part because of the demand we're satisfying. Generally, it's high complexity small volume specialist manufacturing and mainly break-fix MRO. So people are tending not to try and project forward what machines might break. They're still buying that sort of as and when they need it. And I think maybe just standing back a little bit from tariffs, we don't see any short-term impact. There's lots of admin costs associated with it but actually there's probably a bit of price inflation that gives you some gross margin opportunity as well. And our business model enables us to take advantage in a tariffed environment. One of the things you heard me refer to is we've done quite a lot of system change over the year that allows us to now adopt product at multi-locations across our global network and distribute out from them. So being a broad MRO-based distributor global -- with global operations and an ability to operate. We have 2,500 suppliers and ability to be -- to switch product and provide alternatives across the globe, I think, positions us quite well in the tariffed environment.

Karin So from JPMorgan. I have 2 questions, please. One is around the delta of the GBP 31 million organic investments versus the range you mentioned around deferred for the future years. Just curious around -- if you could elaborate around the thinking of that? And how should we think about the lower end range of the GBP 35 million to GBP 40 million for next year? And then my second question is around probably also for Kate, of the free cash flow improvement with better working capital. Just trying to understand, should we interpret this as more of a one-off? Or is there kind of any structural changes you mentioned for the working capital management?

So I think I'll start and then hand it over to Kate, Karin. Just on the GBP 31 million of strategic investments we've made, being at the lower end of the range we guided to, sort of 2 things going on there that resulted in a deferral into later years of some of that investment. One is continuously analyzing the scheduling and interdependencies of some of this investment work and derisking it by moving bits and pieces of it around. And a little bit it is also the person on my left, who's got an appropriate stick when we need it. It does show that we can be effective and agile and manage our investments to the trading environment that we find ourselves in without losing the significant opportunity that's out there. And indeed, we don't think we've pushed any of it to the right with this deferral. In fact, we think we'll be more efficient with that spend. Anything you want to say on this year's spend and then the free cash flow, Kate?

Yes. I mean, really, what we're reflecting here, Karin, is having taken a really good look at what projects were live, what is the interdependencies that we have on the projects that's either starting or in train and also what the right resourcing expertise that need to be applied. A lot of what we've done in terms of looking at what we wanted to spend this year and where we've landed is making sure that we're doing that efficiently and effectively. And also clearly conscious of the broader environment that we're in. So pacing is important because otherwise, there's a risk you don't spend the money well. So that's why we're looking to an increase certainly into this year. I'm guiding to kind of the lower half of the GBP 35 million to GBP 45 million . So somewhere between GBP 35 million and GBP 40 million is probably where I'd expect you guys to guess where we end up and we'll update along the way. With regards to the free cash flow, I mean, fundamentally, what we did this year is we took a really good look at what was going on, on cash flow, our forecast, our metrics, really a lot of measurement around DSO, DPO, the inventory turns are like, things you'd expect us to be looking at really closely. We have, in the year, achieved a bit of a working capital release by improving metrics. And one of it was putting in like an additional system capability within receivables. That just allowed us to do that better within year. So what I'm expecting going forward is for us to at least maintain the quality of those metrics. But there is an in-year one-off release that results in improving, for example, DSOs by -- I think it was around 3 days that we proved to buy across the piece.

Annelies Vermeulen from Morgan Stanley. I have 2 questions as well, please. So firstly, on RS PRO, you talked about range development. I was wondering if you could expand on that in terms of what you've been adding on the RS PRO side? And the 2 percentage points increase, is that -- are you actually seeing customers convert from branded to own brand? Or is it just incremental sales of the newer brand -- own brand products that you've launched? And perhaps you could comment also as you accelerate that, how you're managing your supplier relationships as to not upset them too much if you're switching to branded? Second question, a little bit shorter. Just on the headcount reductions, 4% this year. Could you comment on how much of that was natural attrition versus active headcount management? And are you happy with where headcount is today if, you never know, volumes do come back and things start to pick up again? Do you feel you've got the right people count in place?

Thanks, Annelies. On RS PRO and range development and one of the things we are -- we now understand much better about RS PRO is that brand development is really important. And in the U.K., the RS brand has got nearly 90 years of investment in it, in other parts of the world, the RS PRO brand is relatively new. And that it's important that we build brand strength and understanding before we launch a huge range of products into those markets. It's also a learning for us that we need to launch products that our customers want to buy and that don't compete with our suppliers. And that's always a constant balance that we're driving. But we have much more data and knowledge now that allows us to influence what products we do actually source with RS PRO. And of course, we're always monitoring that it is not getting in the way or cannibalizing some of our supplier relationships. In fact, some of our suppliers actually supply us with those products, the RS PRO brand. So often it's done in conjunction with our suppliers, not isolated from them. But this will be a slow and continuous build of an important range of RS PRO products that over time, we would continue to expect to see RS PRO grow as a percentage of group revenue. And I think up to 20% over a number of years is the sorts of targets that we're looking for. On headcount and headcount reduction. Some of it is hiring freeze but quite a chunk of it is people actually leaving the organization. Now a chunk of that is to do with the combination of Distrelec and RS. We're taking the best of both but we did identify some duplication. I think those -- that headcount reduction is relatively permanent. We still have very significant capacity in the business, both from physical and people and process capability. The one area where you're likely to see headcount increase as volumes increase and as we go back to growth is in the physical distribution centers themselves but that's a relatively small proportion of our total labor base. So I don't envisage a huge labor influx as we move into growth.

Ryan Flight from Jefferies here. Three from me, if I may. So first one on a pretty high level, the competitive landscape given the tough operating environment. I wonder if you could give us an update on whether you've seen some exits? #2, you've obviously seen a little bit of a drag from the smaller customers in digital. I wonder if you can give us some more color on the kind of dynamics behind that and what's required for that to turn? And then third, the bullet point on shareholder returns beyond the dividend. I wonder, again, if you could give us some extra color on what would be required. Is there a floor to leverage and your thinking behind that?

Competitive landscape, it feels to us like we're taking share from the smaller, local, nondigital distributors really across the globe. We have seen 1 or 2 get into financial challenges but we haven't seen a material change in the competitive landscape anywhere we play. I mean, interestingly, we refer to our acquisition pipeline and our rigor around value. We certainly feel that perhaps some of the sellers in today's world are not necessarily reflecting the reality of the environment that we're trading in and that value tension is keen at the moment but we'll see how that plays out. On the sort of smaller customers in digital, Kate referred to the fact that we are seeing less of those smaller customers and that is the area of our business that continues to decline a bit. A lot of those customers are buying one-off electronic components. But also those buyers are probably the most price sensitive in our portfolio. And of course, we are there to satisfy immediacy of need and availability and that comes with a price. So I think we continue to monitor that. We're continuing to create a much more targeted approach to ensure that we can meet those customers' needs but at the right cost to serve for ourselves but we don't regard it as a major issue. Shareholder returns.

So I mean I think pretty much consistent with what I said. We've got a clear order of capital allocation and we hold to that. With regards to leverage, we give guidance around broadly 1 to 2x leverage is where we are. And absolutely, we're on the lower end of that at the moment. And as we said, we're actively monitoring and looking at a pipeline of acquisitions and those are the dynamics that we look at across the piece. Do we have good opportunities to deploy our capital in organic and inorganic? And if we don't see those opportunities over a period of time, then we look at the right options to return capital and cash to shareholders. That's -- I don't think there's much more I can add to it other than what I've said.

I think we've got -- we see plenty of opportunities for value-creative deployment of our capital today. We don't think we're sitting here with surplus capital. If it does get to that point at some stage in the future, we will, of course, look at how best to get it back to shareholders.

All right. It's James Rosenthal from Barclays here. I've got 3, if I may. First is, I mean, do you have a view on what organic revenue growth could be for this year? And can you grow twice the market as per the medium-term plan? The second one is, you mentioned growth with smaller customers. But on the flip side, growth of larger customers seems to have gone a bit better in FY '25. Is that something you can progress further in FY '26? I appreciate your thoughts there. And then lastly, could we have an update on the U.K. business. The last time we heard from you, that was a bit more challenging but...

Thanks, James. If you'll forgive me, I won't [ answer ] the first bit of your first question, what do I think growth will be next year. I think what we've said relatively consistently here is a good indicator of the market environment that we're facing will be provided to you by PMIs and what they're doing. I think even in a relatively flat industrial environment, we can continue to grow and we're very comfortable with the work we're doing. And we've even demonstrated to ourselves in the last couple of quarters that we can continue to grow even when markets are tough. But giving you an absolute number on that, I suspect it's probably something I will get into trouble for doing. And if I knew, I'd probably be sitting on a beach drinking piña coladas, not sitting here because I would be able to predict the future. So what I can tell you is that our business, as we've demonstrated this year, can operate in pretty much any sort of environment. And the most important thing is medium and long term, we absolutely see the structural drivers that return our markets to growth and our ability to grow at twice those markets is probably underpinned by the work that we've done this year. You're right about large customers. We talked about focusing on high lifetime value customers and we did grow our large customers, what 6%?

Yes, revenue in that grew again.

Revenue, 6% last year. We anticipate that continuing to grow going forward. But our strategy is about focus on those high lifetime customers but don't forget everybody else because they're still a big proportion of our business. So ensuring that, using the tools we've put in place today, ensuring we have the data that allows us to offer those smaller customers, the products and services they need at the right cost to serve is also part of what we've been working on and we'll continue to work on going forward. Then the U.K. U.K. is tough. I'm just going to look what the PMI is doing. After actually quite a positive start to our fiscal '25, in terms of PMIs, they turned pretty rapidly sort of in the last quarter of the calendar year and they haven't really recovered. Now we're actually doing relatively well in that environment but the broader market in the U.K. remains challenging.

It's Rory McKenzie from UBS. And firstly, can you give us more detail on the error you found in the inventory measurement? And why was that reported as a restatement rather than a GBP 19 million extra cost of provisions this year, if that makes sense? And then secondly, I think in the release you referenced average order value was down and frequency was up. And has that been a trend all year long? As you dug into that, what does that represent? And I guess that brings in a way, a form of margin pressure, that mix changing. So has that changed sort of how you think about either your pricing or how you build your model for cost to serve?

Thanks, Rory. Do you want to take the accounting one?

The dynamic around the inventory measurement. So firstly, let's just answer the question as to why it's a prior adjustment as opposed to an in-year. So a prior year adjustment is where you correct for the incorrect application of a group policy, which is what we are talking to here. We would do something in-year if we had a change of estimate. So this isn't a change of estimate. This is when we've really gone in and rigorously looked at how the group policy was applied across the group. There was an area where it hadn't been consistently and appropriately applied and that's related primarily to prior years and therefore, we've adjusted accordingly.

Yes. I think on the question, Rory, about average order value frequency. You're right. Average order value is down a bit, frequency is up. A couple of things driving that. I think, firstly, when times are tough, people tend to buy for what they need, when they need it. They also tend to buy -- they tend to run machines longer, do less planned maintenance and overhaul and therefore, have more immediate need and therefore, are ordering just that thing because that thing broke. So there's a bit of that going on. The other thing that's going on is we're coming off 3 years or 2.5 years of post-COVID trading, when a number of our product categories, supply chains were very difficult and constrained. And we did see a big run up in average order value over that period because people weren't just buying for immediate need, they were also buying for availability. That has unwound. And I think what you're seeing now is people back to buying break-fix MRO as break-fix MRO. Does it create additional margin pressure? It does a little bit because you're shipping more parcels for the same amount of revenue but it's not a massive margin headwind. So it doesn't change our view of what those medium-term margin targets can be.

Tom Callan from Investec. Just picking up on comments around the closure of the Distrelec DC in the Netherlands. Can you just remind us of where you are currently in terms of capacity levels across the various DCs that you have? And your view on sort of headroom and what competitive advantage that might give you in this environment? .

Thanks, Tom. Yes. So we accelerated the -- we negotiated an early exit out of the Distrelec central distribution center in Holland. We are in the process now, actually most of the way through moving that product from Holland, mainly into our Bad Hersfeld distribution center in Germany. That's actually quite -- is a surprisingly complex thing to do because not only do you have to put the stuff on a truck and ship it to Germany, you have to rebuild all the routings and the pricing manuals and the data content that allow people to find it on your website and as they order and we're pleased with the progress that we're making and that will be closed by the end of June. But that is still leaving us with very significant capacity, both process and physical across the network. We continue -- we're continuing to invest on a through-cycle basis to build that capacity and also increasingly to automate it, which creates more capacity. So investments in the U.S. and in France. We would not need to add any additional physical distribution to get back to volumes that are well above where they were at the prior peak. It's difficult to estimate that specifically but we've got 40% or 50% physical inventory capacity if we need it. It's slightly the opposite. We need to make sure we can continue to affect -- to apply very effective inventory management and only build physical inventory into that capacity as and when we can sell it.

Sam Dindol from Stifel. Two questions from me, please. Firstly, on bolt-on M&A. Is that something that's on the agenda in the upcoming 12 months? I think you said valuation is probably not reflecting where the market is and a lot going on internally. And then secondly, on the 150 basis points of cost savings. Appreciate we're sort of 8 months on from the CMD. Any change in thought on how that could be phased or any areas which are showing more promise than you would have thought 8 months ago?

Thanks and I'll do bolt-ons and then I'll leave Kate to answer the -- the -- answer the question on the 150 basis points, which I might add my color to at the end. On bolt-ons, yes, absolutely. They have and always have been on the agenda. We acquired Trident at the beginning of the year, very pleased with that, fitting well into the business and performing very well. The -- I alluded to a good pipeline but not necessarily in alignment of buyers and sellers views. We'll continue to monitor those and to see what happens over the year. But the strong -- the pipeline is pretty strong at the moment, I suggest. And then have our views on GBP 45 million changed very much?

So let's just kind of repeat the orientation because I recognize there's a lot of numbers that sort of fly around. So originally, we talked to a GBP 30 million target. And then we updated that to an additional 150 basis points, which in this presentation today are for ease of reference converted to looks like around GBP 45 million. So of the GBP 30 million target, we've already delivered that. So from last year and this year, we delivered GBP 38 million in total. We're looking at a further at least GBP 15 million in full year '26. I would say with regards to what we've done, the easy stuff has been done, where we've identified duplication, where we've got and identified the integration cost savings and benefits. We've identified what they are. We're well underway and we've talked about Distrelec. And we're now moving on to things that I would say are a little bit more tricky. They do require more in terms of process investment, system investments, removing duplications of applications and the like but we're underway. It's a multiyear program but we're underway. And we'll continue to review what savings we can make and update you accordingly.

And that's what I thought the financier should say. And I'm far enough away to say, I think a year in, we are more than comfortable with the sort of 150 basis points, GBP 45 million. We think there's more to go for. As and when we can quantify it, we will. But it is as a result of the work that we're doing. I'm not sure that we'll need a huge amount of additional work. So I think you should assume that, that GBP 45 million number is solid and probably a bit conservative and until FD kicks me. But we'll keep you informed as we see an opportunity to evolve that. Just conscious of it being 10:04. We've got some questions online, Lucy.

Just, I think most of them have been covered but one of them is just to clarify, Kate, on the GBP 13 million of in-year sort of cost savings. They talk, obviously, you've identified the GBP 5 million from the DC exit. Can you give more detail on the GBP 8 million ? And is it repeatable, please?

Sure. So I mean you would always expect in a business like ours with the cost base that there's a degree of choices that you make with in-year as to where and how you spend some of the more discretionary spend, how you deal with vacancies, how you deal with travel, how you make other in-year choices. And that's effectively what that GBP 8 million is, is choices that we've made, recognizing a more challenging market that we save this year. In any year, we'd look to do that. In any year, we'd look around those different discretionary choices that we make in order to manage our cost base. So all those direct choices repeatable? No. Are other choices makeable? Yes, is how I would hold that -- is how I would hold that number. There is flexibility in our cost base. We manage it very vigorously. You'd obviously expect us to be able to do that.

Okay. Conscious it's 10:05. Thanks very much for your attention and your time and look forward to seeing you all over the course of the year.