# RS Group to accelerate growth and value creation

- Link: https://www.directorstalkinterviews.com/rs-group-to-accelerate-growth-and-value-creation/4121119774
- Published: 2023-05-23T07:21:49+01:00
- Author: Amilia Stone

**[RS GROUP PLC](https://www.directorstalkinterviews.com/ftse-company/rs-group/rs1.l)**(
LON:RS1) has announced its results for the year ended 31 March 2023.

**SIMON PRYCE, CHIEF EXECUTIVE OFFICER, COMMENTED:** “RS delivered a strong performance
in 2022/23 despite a more challenging macroeconomic backdrop in the second half.
This reflected our on-going operational excellence initiatives, geographical, industry
and product mix, inventory availability and strong pricing. Together with the efforts
of our people this resulted in good financial results. We also acquired domnick 
hunter and Risoul and, after year end, agreed to acquire Distrelec. 

After 30 days in the role, I am excited about the opportunity I see for RS going
forward. We have a solid business, a sound strategy and great people. We are transitioning
to an omni-channel operator in a large and fragmented market. We are supplier and
increasingly customer focused, who see the value we bring as we move from being 
a product distributor to a solutions provider. We continue to invest in operational
improvement, customer experience and digital and technical capabilities, and are
extending our relevant product offer and value-added service solutions.

While we are mindful of near-term external challenges, we remain comfortable with
current consensus profit expectations for 2023/24 and have the tools, proposition,
financial capacity and roadmap to deliver significant outperformance over time and
capitalise on further strategic opportunities to accelerate growth and value creation.”

| **Highlights** | **2023** | **2022** | **Change** | **Like-for-like^(1) change** | 
| **Revenue** | **£2,982.3m** | £2,553.7m | 17% | 10% | 
| **Adjusted^(2) operating profit** | **£402.2m** | £320.4m | 26% | 18% | 
| **Adjusted^(2) operating profit margin** | **13.5%** | 12.5% | 1.0 pts | 0.9 pts | 
| **Adjusted^(2) profit before tax** | **£390.7m** | £313.8m | 25% | 17% | 
| **Adjusted^(2) earnings per share** | **63.6p** | 51.3p | 24% | 16% | 
| **Operating profit** | **£383.0m** | £308.8m | 24% | 17% | 
| **Profit before tax** | **£371.5m** | £302.2m | 23% | 16% | 
| **Earnings per share** | **60.4p** | 48.9p | 24% | 16% | 
| **Full-year dividend** | **20.9p** | 18.0p | 16% |  | 
| **Adjusted free cash flow^(3)** | **£263.6m** | £162.9m | 62% |  | 
| **Cash generated from operations** | **£413.0m** | £267.1m | 55% |  | 
| **Net debt^(3)** | **£113.0m** | £42.1m |  |  | 
| **Net debt to adjusted^(2) EBITDA** | **0.2x** | 0.1x |  |  |

**Strong financial performance driven by availability, inflation and improved adjusted
operating profit conversion**

·      Revenue growth of 17% includes 10% like-for-like, 2% acquisition contribution
and 5% currency benefit

·      Industrial products, 76% of Group revenue, grew like-for-like revenue by 
16% with electronics products, 23% participation, growing 1%

·      Adjusted operating costs grew 18%, 13% like-for-like, reflecting inflation,
ongoing strategic investment of c. £20 million and c. £10 million of ad hoc payments
to support our people during more difficult times

·      Adjusted^(2) operating profit margin grew 1.0 pts to 13.5%, with adjusted
operating profit conversion^(3) of 29.7%

·      Final dividend increased to 13.7p; full-year dividend of 20.9p

**Ongoing investment in operational and strategic improvements**

·      Enhanced product and content management work to develop our proposition

·      Freight and distribution optimisation work as our model becomes more local,
regionalised and sustainable

·      Detailed customer analysis to understand our customers better and improve
our service offer

**Good financial management and cash generation supporting organic and inorganic
investment**

·      Adjusted free cash flow of £264 million despite inventory investment

·      Net debt of £113 million includes £234 million for acquisitions, with net
debt to adjusted EBITDA of 0.2x (0.9x proforma post Distrelec)

·      Return on capital employed remains strong at 30.8%, due to profitability 
and maintained financial discipline

·      Acquired domnick hunter and Risoul and announced agreement to buy Distrelec
post year end^(4) 

**Current trading and outlook**

We continue to outperform in the industrial market, especially in EMEA, although
trading over the first seven weeks of 2023/24 reflects a slowing in industrial growth,
as indicated by PMI data, and continued weakness and aggressive competition in electronics.
Despite this more uncertain economic environment and the strong comparator period
last year, we are comfortable with current consensus profit expectations^(5) for
2023/24, albeit with performance more weighted to the second half.

1.         Like-for-like change excludes the impact of acquisitions and the effects
of changes in exchange rates on translation of overseas operating results, with 
2021/22 converted at 2022/23 average exchange rates. Revenue is also adjusted to
eliminate the impact of trading days year on year. Acquisitions are only included
once they have been owned for a year, at which point they start to be included in
both the current and comparative periods for the same number of months (see Note
10 for reconciliations).

2.         Adjusted excludes amortisation and impairment of intangible assets arising
on acquisition of businesses, acquisition-related items, substantial reorganisation
costs, substantial asset write-downs, one-off pension credits or costs, significant
tax rate changes and associated income tax (see Note 10 for reconciliations).

3.         See Note 10 for definition and reconciliation.

4.         Acquisition of Distrelec B.V. subject to regulatory clearances and we
anticipate it will be completed by the end of July 2023.

5.         Consensus for the year ending 31 March 2024 is revenue of £3,116 million,
adjusted operating profit of £390 million and adjusted profit before tax of £379
million. Source: rsgroup.com/investors/analyst-coverage.

**BUSINESS REVIEW**

RS is full of great people who have delivered strong profitable growth against a
more challenging economic backdrop working together as a team to continue making
amazing happen for a better world.

**Our journey**

We continue to make progress on our journey as we transition from being a product
distributor to a solutions provider for industrial customers around the world. The
strength of our proposition lies in the combination of our broad product offer, 
high-touch and digital-enabled service and growing solutions portfolio, all delivered
through the increasingly effective use of data and the knowledge and commitment 
of our amazing people.

During the year, we have transformed our brand architecture towards the RS brand
globally that can be recognised by our stakeholders anywhere in the world. Operating
as RS we can leverage our brand strength and marketing assets more widely to generate
stronger supplier relationships and deliver a better customer service. This will
help us fulfil our vision of becoming first choice for all our stakeholders.

We are a global business operating under one brand but are managed at a regional
and local market level to ensure we can meet the specific needs of our customers
and suppliers better. This allows us to understand the unique drivers of each market
so that we adapt our offer to local demands and utilise local resources as much 
as possible to increase efficiency and reduce costs. Our global business functions,
such as technology, people, marketing and data, provide specialist support and insight
which the regional teams utilise to suit their specific requirements. This empowers
our regions and local country markets giving them greater accountability and responsibility.

For a Better World

We have made good progress towards our 2030 ESG action plan – For a Better World.
We are making positive strides towards our 2030 net zero ambition and have set science-
based targets covering our Scope 1, 2 and 3 emissions, including a commitment to
reduce our direct emissions by 75% by 2029/30 relative to 2019/20. We have achieved
leading status in a number of global ESG ratings including being awarded AA rating
from MSCI and being included in the Dow Jones [Sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news)
Indices Europe for the first time.

The world is at a pivotal point in the fight against climate change and all businesses
need to take action to decarbonise their wider supply chain. We are working together
with our customers and suppliers to reach a net zero value chain by 2050. This involves
us optimising our facilities and supply chain, as we use our regional model to increase
the amount of inventory held locally, so reducing freight miles.

This is also an exciting business opportunity for RS as we help our suppliers develop
new products that use lower impact materials, offer our customers solutions to reduce
energy consumption and decarbonise their facilities, and offer a more sustainable
product range, our Better World products, that help customers tackle their sustainability
challenges.

**Reviewing 2022/23**

We generated 17% revenue growth during the year and our operating profit grew by
24%.

We have delivered very strong growth in our industrial product ranges in all three
regions, due to a strong proposition and market share gains, but experienced volume
declines in our electronics product range, reflecting the softer market and strong
comparative performance of last year.

We are working hard to support our customers better – the designers, operators and
maintainers of industrial equipment and operations. Our average order value has 
increased 21% to £255 (excluding RS Integrated Supply’s
pass-through sales orders),
over and above inflation, as we have focused our sales and marketing efforts on 
our higher spending customers and promoted our digital self-service to lower-spending
transactional customers. Our on time to promise metric improved by 5 percentage 
points to 91%. We have a lot of data, insight and knowledge of our customers and
their needs, and can see significant upside from providing a more customised and
personalised offer as we develop our customer segmentation and service model and
deploy our sales forces more appropriately.

We provide an important service to our suppliers given our customer reach, technical
knowledge and execution capabilities. Our customers generally require small volumes
of many products for their maintenance, repair and operations (MRO) needs and we
provide the expert knowledge for them to understand if these products are compatible
with their current operations. Our suppliers do not tend to have the distribution
capabilities, or desire, to service or deliver directly to these customers in such
small volumes. RS plays a very important role connecting over 2,500 suppliers and
1.1 million customers.

Developing our offer

We are continuing to widen our product offer to provide more specialist ranges, 
allowing us to strengthen our supplier relationships further as we help market, 
sell and distribute their existing and new products. Such an example has been in
safety product and service solutions in EMEA where we now offer a much more extensive,
comprehensive and specialist range after our acquisitions in 2020/21 of Needlers
and Liscombe.

We have seen strong growth in our own brand, RS PRO, which has benefited from enhanced
brand recognition and more targeted marketing campaigns, such as an energy efficiency
promotion earlier this year. RS PRO also offers a quality-assured alternative to
the branded ranges, providing customers with a lower priced option. During the year,
we invested in a state-of-the-art RS PRO lab at our distribution centre (DC) in 
Corby, UK, which allows our team of engineers to test, monitor and measure new products
better.

We continue to grow our portfolio of product and service solutions that increase
the value add we provide to our customers, driving greater loyalty, recurring revenue
and product pull through. During the year, we expanded our service solutions offer
in Americas and Asia Pacific and have enhanced our offer in EMEA, especially within
the maintenance areas where we have delivered strong growth within calibration, 
predictive maintenance and energy optimisation. RS Integrated Supply, which provides
outsourced procurement and storeroom solutions to large organisations, has seen 
a significant increase in new contracts signed. We believe our global offer is industry
leading and are excited by our proposition given the number of existing customers
who are expanding the number of sites we service for them.

We are monitoring our offer versus the market and competitors to ensure we are providing
value to our customers while optimising our gross margin. During the year, we benefited
from the combined effect of price inflation and a lagging effect in our cost of 
sales due to our low inventory turn and greater utilisation of our price optimisation
tools to calculate the best pricing and discounts.

Continuing to invest in the future

Cost pressures have continued to be a headwind during the year, especially for labour,
technology, freight and energy. Additionally, we have invested in our operating 
model to strengthen our proposition. This has focused on areas such as branding,
digital, technology and systems and areas relating to our strategy.

As an organisation, we believe we are connected closely to our people and are aware
of the more difficult economic backdrop and cost of living crisis they have experienced.
We have therefore taken steps to support our employees during the year with an ad
hoc payment in November 2022. A further ad hoc payment was approved in March 2023
and paid in April to all eligible employees, excluding our senior leaders, to help
them deal with the impact of exceptional personal cost inflation.

Creating value through acquisitions

We have accelerated our growth inorganically in the year with the addition of domnick
hunter-RL (Thailand) Co., Ltd. (DH) in Thailand and Risoul y Cia, S.A. de C.V. and
its subsidiaries (Risoul) in Mexico. Both acquisitions have expanded our service
solutions capabilities, our product range and deepened our geographic coverage. 
In addition, Risoul will benefit from the global trend of near shoring, especially
within North America, and so is experiencing a strong market backdrop and is performing
slightly ahead of our initial expectations. Integration of both businesses is going
well and we are excited about the opportunities to develop their service solutions
capabilities and to introduce our own-brand range. We expect to generate significant
shareholder value through expansion of their product range and services, developing
their digital offer and leveraging our execution expertise. 

Our acquisition pipeline remains strong. We have a disciplined approach to mergers
and acquisitions, focusing on four areas: (i) our solution capabilities; (ii) product
range; (iii) geographic reach and (iv) operational and cost efficiencies through
consolidation opportunities. We continue to focus on acquiring high-quality, high-
synergy businesses and, more critically, businesses with a strong cultural fit. 
We announced, post the year end on 27 April 2023, that we have reached agreement
to acquire Distrelec B.V. for €365 million which will significantly expand our presence
in continental Europe, bring strong synergy potential and accelerate our value creation
further.

Our strong M&A track record was externally recognised by the ICAEW as we were awarded
the 2023 Corporate Development Award for increasing our shareholder value through
our strategic market acquisitions.

Aligning our people with our strategy

Our performance has been driven by our people and we recognise the importance of
investing in them to incentivise and reward the value they bring to all our stakeholders.
It has been an ambition of the Group that all our people share in the long-term 
success of the Company, which is why we launched the RS YAY! Award during the year,
awarding up to 100 performance shares to every eligible employee.

**How we drive our vision**

At RS, our vision is to become first choice for all our stakeholders: our people,
customers, suppliers, communities and shareholders. This includes finding the best
answers to solve our customers’ problems and partnering more closely with our suppliers
to provide efficient and sustainable solutions. We want to work with all our stakeholders
on our journey to realising our vision.

Working to a set of shared values

Our people bring our ambition and aspiration to life, which is why having a high-
performance, purpose-led culture remains our highest priority. To cultivate this
culture we need to provide a clear set of values and behaviours, and the training
and development support to achieve this. We have been strengthening our leadership
structure and have a clear focus on executing our Amazing Leaders framework while
increasing diversity and inclusion. All of this will ensure that we have the very
best people working together to deliver results that delight all our stakeholders.

Operational efficiency

We want to do the basics brilliantly, thereby putting in place strong foundations
for us to operate more efficiently. Key to this is executional excellence and simplifying
our business model. By operating more efficiently, we become more effective which
enables our customers and suppliers to trust us to act as partners to help solve
their problems, allowing us to engage in value-creating activities. Innovation is
crucial to support us in being more efficient.

Developing our differentiated proposition

We see significant opportunity to increase our market share through differentiating
our proposition further through our product and service solutions offer and enhancing
our customer experience. Ultimately, we want our customers to come to RS as their
first choice for their industrial and MRO needs.

_Ease of doing business_

We provide a digital offer with human touch; a combination that is crucial in delivering
the best customer service. Our customers want us to provide the knowledge and insight
but also the ease of doing business. Being able to provide our customers with a 
service that reduces the time and increases the efficiency of their MRO procurement
will improve the overall customer experience and differentiate us from our competitors,
so expanding our share of customers’ wallets and increasing their loyalty.

_Solving our customers’ problems_

We aspire to be more than just a product or price to a customer. We want to provide
product and service solutions that meet the needs of designers, operators and maintainers
of industrial equipment and operations as they manage their design, procurement,
inventory and maintenance needs. Our ability to solve challenges for our customers
by combining our products, services and digital solutions together is a key differentiator.

_Extensive product offer_

We continue to introduce new products across our wide product portfolio, helped 
by our strong supplier relationships, our digital capabilities and greater DC capacity.
Our own brand, RS PRO, is a huge lever for growth and profitability and a great 
value alternative for our customers.

**Looking forward**

We operate in a large and fragmented market and have great people with the capabilities
to turn our opportunities into realities, customers with whom we can grow our share
of wallet and suppliers with whom we work in partnership. We have a solid strategy
that we are executing where ESG is both core and represents a potentially significant
business opportunity. We continue to strengthen our proposition through widening
our product range including our own brand and sustainable product ranges, expanding
innovative and sustainable solutions and developing our digital, technical and service
capabilities to improve our customer experience. We are financially strong, providing
us with the opportunity to accelerate our growth ambitions organically and inorganically.

Despite the challenging external environment, the breadth of opportunity for both
improvement and growth is exciting. We will continue to invest to drive future market
share gains while managing our cost base appropriately as we target value-creating
sustainable growth. We are confident of the Group’s strategy and future prospects
and look forward to taking this business forward at pace.

**REGIONAL PERFORMANCE**

**EMEA**

| ** ** | **2023** | **2022** | **Change** | **Like-for-like****^(1)** **change** | 
| **Revenue** | **£1,768.5m** | £1,579.5m | 12% | 12% | 
| **Operating profit^(2)** | **£275.8m** | £243.7m | 13% | 12% | 
| **Operating profit margin** | **15.6%** | 15.4% | 0.2 pts | 0.1 pts | 
| **Digital revenue^(3)** | **£1,311.1m** | £1,126.3m | 16% | 16% | 
| **RS PRO revenue^(3)** | **£338.0m** | £279.9m | 21% | 21% | 
| **Service solutions revenue^(3)** | **£519.3m** | £430.3m | 21% | 21% |

1.         Like-for-like adjusted for currency; revenue also adjusted for trading
days.

2.         See Note 2 for reconciliation to Group operating profit.

3.         See Note 2 for disaggregation of revenue analysis and reconciliations
to region’s revenue.

Revenue grew by 12% to £1,768.5 million benefiting from price inflation and strong
engagement with our larger customers who participate in many of our service solutions.
Operating profit increased by 13%, 12% on a like-for-like basis, with operating 
profit margin increasing to 15.6% driven by improvements to gross margin and operating
efficiencies in our markets.

Digital performance remains ahead of the region’s revenue growth as we continue 
to improve user experience and content quality for customers transacting on our 
websites. As larger customers migrate to eProcurement, we have also been able to
increase our share of wallet. Web revenue grew by 14% on a like-for-like basis.

Our main own brand, RS PRO, has continued to outperform in all markets. We have 
continued to build the RS PRO range with a focus on products that promote efficiency.
We have also expanded our design and test facilities in Corby, UK, to allow us to
demonstrate and validate RS PRO’s quality.

Our industrial product ranges performed consistently well throughout the year with
like-for-like revenue growth of 17%.

UK and Ireland, our largest market in EMEA accounting for 39% of the region’s revenue,
saw strong growth. There was a benefit from selling price increases, most of which
were a direct pass-through of supplier cost increases, along with continued recovery
in sectors such as transport, defence and original equipment manufacturing which
had been impacted significantly during COVID-19. We have focused on industries where
we believe we can deliver most value through our service solutions.

Our German business grew strongly in the first half as we continued to benefit from
our deep and broad product range. In the second half growth slowed with a reduction
in electronic product volumes as supply constraints eased and demand softened. Our
highly automated and recently expanded DC in Bad Hersfeld, Germany, is increasing
its stocked product lines.

France has continued to see solid growth and share gains due to our strong proposition.
The teams have utilised data and insight to ensure we have the right products available
locally, with high-quality content and relevant pricing.

RS Integrated Supply in EMEA secured several new customers during the year. However,
the operational investment from expanding into new territories and delay in some
new contracts launching, largely from the customer side, has had an impact on the
financial performance. Spend levels from customers in some of the heavier industries
are now recovering to pre-pandemic levels.

OKdo revenue was impacted by the termination of the Raspberry Pi supply agreement.
This has led to a decline in OKdo’s revenue of 46% like-for-like and it now accounts
for 2% of the region’s revenue. New innovative lines have been added including ROCK
products launched in July 2022.

Supply shortages, which impacted the early part of 2022/23, have eased during recent
months and enabled an improved service to our customers. This has supported an improvement
in our rolling 12-month Net Promoter Score (NPS) over the year.

**Americas**

| ** ** | **2023** | **2022** | **Change** | **Like-for-like****^(1)** **change** | 
| **Revenue** | **£945.5m** | £718.7m | 32% | 11% | 
| **Operating profit^(2)** | **£148.5m** | £99.3m | 50% | 28% | 
| **Operating profit margin** | **15.7%** | 13.8% | 1.9 pts | 2.3 pts | 
| **Digital revenue^(3)** | **£404.8m** | £311.6m | 30% | 15% | 
| **RS PRO revenue^(3)** | **£7.1m** | £4.8m | 48% | 31% | 
| **Service solutions revenue^(3)** | **£166.0m** | £123.8m | 34% | 16% |

1.         Like-for-like adjusted for currency and to exclude the impact of acquisitions;
revenue also adjusted for trading days.

2.         See Note 2 for reconciliation to Group operating profit.

3.         See Note 2 for disaggregation of revenue analysis and reconciliations
to region’s revenue.

Revenue increased 32% to £945.5 million, driven by our acquisition of Risoul which
has delivered slightly ahead of our expectations. Excluding Risoul, exchange rate
movements and the impact of trading days, like-for-like revenue growth of 11% was
driven by price increases and product availability. Operating profit increased 28%
on a like-for-like basis with operating profit margin increasing from 13.8% to 15.7%,
due to improving gross margin and a leaner cost base.

Given market supply constraints in the first half, we benefited from our strong 
product availability and customers building inventory levels to protect continuity
in their production. In the second half, the market weakened resulting in an easing
in global supply constraints and increased competitive pricing pressures, reflected
in our like-for-like growth of only 1% against very strong comparatives, following
21% like-for-like growth in the first half.

We saw a reduction in the number of resellers and small customers who traded with
us during the period of global supply constraints as they reverted to their legacy
and lower priced volume suppliers. Additionally, there have been significant decreases
in trading within specific market segments due to some legislative shifts.

Our sales and marketing teams have focused on identifying new revenue generating
opportunities tied to providing a more comprehensive and total solution for our 
customers. This has included our expanded product offering, exciting new supplier
partners and a new virtual technical solutions centre capable of helping customers
evaluate products, design projects and maintain their operations.

Our digital like-for-like revenue growth was ahead of the region’s revenue growth
as we moved some of our large customers onto our eProcurement platforms. Web revenue
like-for-like growth was in line with the region’s revenue growth due to reduced
traffic associated with a lower demand mainly from lower value customers who had
used our website during supply shortages. There was expected, temporary disruption
with our transactional customers during the February 2023 rebrand as search engines
re-indexed our new ecommerce domain and our sales teams concentrated our marketing
efforts on our higher-service, higher-value customers. We have increased our paid
advertising to attract higher value traffic.

RS Integrated Supply in Americas has benefited from a greater focus on more profitable
accounts and operational processes that provide greater scalability and improved
efficiency. This led to an improvement in customer retention rates. We have a robust
future pipeline and, because of working closely with our operations in EMEA, have
won contracts to service the European operations of some of our US-based customers.

RS PRO has a low participation rate within Americas, but we expect strong growth
following the branding changes as customers associate the product range with the
brand.

Our stocked product range expanded by 25% in line with our strategy to broaden our
offer further into the industrial MRO market. Service levels from our DC have been
stable throughout the year and we continue to drive efficiency benefits from the
recent investment in scale and automation.

Despite supply chain disruption over the year, our teams were able to provide great
customer service and availability across our product range which meant our rolling
12-month NPS was broadly stable.

**Asia Pacific**

| ** ** | **2023** | **2022** | **Change** | **Like-for-like****^(1)** **change** | 
| **Revenue** | **£268.3m** | £255.5m | 5% | (2)% | 
| **Operating profit^(2)** | **£38.4m** | £29.3m | 31% | 22% | 
| **Operating profit margin** | **14.3%** | 11.5% | 2.8 pts | 2.9 pts | 
| **Digital revenue^(3)** | **£160.8m** | £155.7m | 3% | 0% | 
| **RS PRO revenue^(3)** | **£37.2m** | £34.0m | 9% | 5% | 
| **Service solutions revenue^(3)** | **£48.7m** | £33.9m | 44% | 37% |

1.         Like-for-like adjusted for currency and to exclude the impact of acquisitions;
revenue also adjusted for trading days.

2.         See Note 2 for reconciliation to Group operating profit.

3.         See Note 2 for disaggregation of revenue analysis and reconciliations
to region’s revenue.

Revenue increased 5% to £268.3 million, driven by beneficial currency movements,
strong performance in the industrial sector and our acquisition of DH in Thailand.
Like-for-like revenue declined by 2% reflecting a challenging geopolitical backdrop
and tough comparators particularly in respect to the weakening electronics sector,
the latter accounting for over a third of the region’s revenue. Operating profit
increased 31%, 22% like-for-like, with operating profit margin increasing from 11.5%
to 14.3%, having benefited from improving gross margin and effective cost control.

While digital like-for-like revenue change is better than the region’s, weaker market
demand and global inventory constraints, particularly in electronics products, have
impacted web conversion with higher growth where our paid activities are focused
on buoyant industries and products with good availability. Customers are migrating
away from web channels, in particular to our eProcurement platforms, which resonate
well with our larger customers who are focused on reducing procurement costs through
vendor rationalisation.

Like-for-like growth in our own brand, RS PRO, outperformed the region’s revenue.
In support of our improved
go-to-market strategy, we have launched bespoke RS PRO
product ranges focused on solutions and energy efficient products.

OKdo revenue fell by 66% like-for-like, impacted by the termination of the Raspberry
Pi supply agreement. The new OKdo product range with ROCK is being rolled out across
the region. OKdo now accounts for 3% of the region’s revenue.

We have boosted our product and service solutions proposition within the region 
by adding onsite services capability from our acquisition, DH; the launch of integrated
solutions including vendor managed inventory, Product Plus; onsite calibration services
and air leak surveys. Revenue from larger customers has grown as this proposition
resonates, driving profitable growth and increased share of wallet.

Revenue from Australia and New Zealand has grown solidly throughout the year, benefiting
from strong growth in large industrial customers. Our success with this customer
group provides a blueprint to scale across the rest of the region.

Greater China, which represents 26% of the region’s revenue, was impacted by extended
lockdowns under the zero COVID-19 policy, ongoing geopolitical uncertainty and greater
exposure to the electronics sector leading to a contraction in revenue during the
second half.

South East Asia saw strong growth in the first half but lower growth in the second
half with softer demand for electronics products. We have invested in expanding 
our local inventory capacity in Thailand and Singapore which will support revenue
growth and improve lead times.

Japan and Korea grew in the first half, continuing the trend from the second half
of the previous year, but revenue contracted in the second half, impacted by supply
issues of single-board computing products and lower demand of electronics products
which together represent more than half of the market’s revenue.

Supply shortages, which have only recently started to improve, impacted our rolling
12-month NPS.

**FINANCIAL REVIEW**

| ** ** | **2022/23** | **2021/22** | **Change** | **Like-for-like^(1) change** | 
| **Revenue** | **£2,982.3m** | £2,553.7m | 17% | 10% | 
| **Gross margin** | **45.3%** | 44.2% | 1.1 pts | 1.8 pts | 
| **Operating profit** | **£383.0m** | £308.8m | 24% | 17% | 
| **Adjusted^(2) operating profit** | **£402.2m** | £320.4m | 26% | 18% | 
| **Adjusted^(2) operating profit margin** | **13.5%** | 12.5% | 1.0 pts | 0.9 pts | 
| **Adjusted^(2) operating profit conversion** | **29.7%** | 28.4% | 1.3 pts | 0.9 pts |

1.         Like-for-like change excludes the impact of acquisitions and the effects
of changes in exchange rates on translation of overseas operating results, with 
2021/22 converted at 2022/23 average exchange rates. Revenue is also adjusted to
eliminate the impact of trading days year on year. Acquisitions are only included
once they have been owned for a year, at which point they start to be included in
both the current and comparative periods for the same number of months (see Note
10 for reconciliations).

2.         Adjusted excludes amortisation and impairment of intangible assets arising
on acquisition of businesses, acquisition-related items, substantial reorganisation
costs, substantial asset write-downs, one-off pension credits or costs, significant
tax rate changes and associated income tax (see Note 10 for reconciliations).

**Revenue**

Group revenue increased by 17% to £2,982.3 million. Like-for-like growth was 10%
after adjusting for the £54.0 million impact of acquisitions, £116.6 million from
favourable exchange rate movements and a negative impact of £10.6 million from fewer
trading days. Revenue momentum slowed during the year, with second half like-for-
like revenue growth of 4%, after 16% in the first half, due to tougher comparatives
and the more challenging macroeconomic environment which has resulted in lower demand.

Industrial production figures, supplier indications and results reported by peers
show that we continue to outperform the industrial market and are gaining share 
as our customers have relied on our product availability, the breadth of our range
and service delivered by our experienced teams.

We have seen a reduction in our total customer numbers to 1.1 million from over 
1.2 million as we have focused less  on low lifetime value and one-off low margin
transactional customers with high costs to serve, instead concentrating on higher-
value opportunities. Our average order value grew to £255 from £211 (excluding RS
Integrated Supply’s pass-through sales orders) with much of the growth driven by
price inflation.

Our industrial product ranges, which account for 76% of Group revenue, grew by 16%
like-for-like during the year with strong growth across all ranges, with 21% like-
for-like growth in the first half and 12% in the second half.

Our electronics products range accounts for 23% of Group revenue and is predominantly
supplied to our industrial customers as they become more digitalised and connected.
We had a more challenging year as supply constraints eased and demand softened especially
for passives and semiconductors components. This was coupled with record growth 
last year causing tough comparatives especially in the second half, resulting in
like-for-like growth of 1% in 2022/23 overall but split between 12% like-for-like
growth in the first half to a 10% decline in the second.

OKdo (our technology solutions business focused on single-board computing (SBC),
Internet of Things (IoT) and education) declined by 52% on a like-for-like basis
following the end of the Raspberry Pi supply agreement, reducing our Group like-
for-like revenue growth from 12% to 10%. OKdo now accounts for 1% of Group revenue
and we are repositioning the offer closer to our industrial customer base.

RS PRO, which is our main own-brand product range and accounts for 13% of Group 
revenue, grew by 19% on a
like-for-like basis, due to the broadening product range
and end-to-end sales and marketing focus in the regions. Our competitively priced
offer continues to gain traction particularly in the current less favourable economic
climate and we now have the capability to demonstrate quality and value through 
our expanded design and test facilities.

Digital, accounting for 63% of Group revenue, performed slightly ahead of the Group
overall, delivering like-for-like revenue growth of 14%. Web revenue increased by
12% on a like-for-like basis, while eProcurement and other digital, which are used
predominantly by our larger customers, grew by 21% on a like-for-like basis.

Service solutions revenue, accounting for 25% of our Group revenue, increased by
25%, 21% like-for-like, to £734.0 million with our digital solutions offer being
one of the strongest areas.

**Gross margin**

Group gross margin increased 1.1 percentage points to 45.3%. Like-for-like gross
margin improvement was 1.8 percentage points excluding the dilutive impact from 
exchange rates and our recent acquisitions. The dilutive impact from acquisitions,
in part, reflects the lower digital participation within the acquired businesses
compared to the rest of the Group. We expect this dilutive impact, on a full-year
basis, to reduce over time as integration continues. During the year we benefited
from a lagging effect in our cost of sales due to our low inventory turn and a more
constrained electronics supply chain for most of the year providing pricing opportunities.
The gross margin also benefited from our continued focus on gross margin optimisation
through direct procurement initiatives, commercial discipline, discount policies
and expanding our own-brand ranges.

**Operating costs**

Total operating costs, which include regional and central costs, increased by 18%.
Excluding amortisation and impairment of acquired intangibles and acquisition-related
items, total adjusted operating costs increased by 18%, 13% on a like-for-like basis.

A large proportion of our operating costs relates to our people and broadly half
of the like-for-like cost increase. We remain mindful of the competitive pressures
for talent we continue to face and so have updated many of our employee benefits
programmes to be more inclusive and increased the level of benefits relating to 
health and wellbeing. These, together with the pay rise across the Group in June
2022 and the c. £10 million ad hoc payments to our employees, have helped reduce
our employee voluntary annual turnover rate to 9.9%.

Operating costs in the regions have been impacted in the second half by electricity
and gas cost increases. More recently, sea freight costs have started to ease and
fuel surcharges have been avoided in most of our domestic carriers. We remain focused
on optimising our network of distribution centres to minimise freight costs and 
miles and we anticipate further benefits from our expanded DC in Bad Hersfeld, Germany,
as we route less inventory through our UK DCs and source more products from continental
Europe.

We invest in our business to ensure it can support the strong organic growth we 
are delivering and the organic and inorganic opportunities we see. As a result, 
operating costs included c. £20 million of strategic investment, a c. £7 million
increase year on year, to strengthen our digital and commercial capabilities, technology
platform, product and service solutions capacity, our rebranding and to improve 
our operating basics.

Central costs (Group strategic investment, Board, Group Finance and Group Professional
Services and People costs that cannot be attributed to region-specific activity)
increased by £8.6 million to £60.5 million. This included investment in global rebranding,
innovation and Group technology infrastructure.

Adjusted operating costs as a percentage of revenue increased by 0.3 percentage 
points to 31.9%, although excluding the one-off payments to our employees this would
have been 0.1 percentage point lower than last year. Our simplified operating model
has driven higher conversion of gross profit into operating profit, with adjusted
operating profit conversion 1.3 percentage points higher at 29.7%. We remain committed
to our target of a 30% adjusted operating profit conversion and high-quality profitable
growth.

**Items excluded from adjusted profit**

To improve the comparability of information between reporting periods and between
businesses with similar assets that were internally generated, we exclude certain
items from adjusted profit measures. The items excluded are described below (see
Note 10 for definitions and reconciliations of adjusted measures).

Amortisation and impairment of acquired intangibles

Amortisation and impairment of acquired intangibles was £16.6 million (2021/22: 
£11.6 million) and relates to the intangible assets arising from acquisitions. Although
Needlers has traded as expected since acquisition, its rebranding to RS Safety Solutions,
effective from 1 November 2022, has entailed an impairment of £3.3 million for the
net book value of the Needlers brand acquired in December 2020. This has resulted
in an update to the definition of adjusted profit to exclude impairment of acquired
intangibles as well as their amortisation.

Acquisition-related items

Acquisition-related items of £2.6 million relate to transaction costs incurred in
the year which are directly attributable to the businesses acquired during the year.

**Operating profit**

Operating profit increased by 24% to £383.0 million. Excluding the impact of acquisitions
and the favourable impact of currency movements, adjusted operating profit saw a
like-for-like increase of 18%. Adjusted operating profit margin improved 1.0 percentage
points to 13.5%.

**Net finance costs**

Net finance costs were £12.2 million up from £7.1 million mainly due to the impact
of higher interest rates and higher net debt due to the acquisition of Risoul. Our
fixed to floating rate interest rate swaps matured during the year and, as a result,
49% of the Group’s gross borrowings excluding lease liabilities at 31 March 2023(
2021/22: 35%) was at fixed rates, with surplus cash deposited at variable rates.

**Profit before tax**

Profit before tax grew 23% to £371.5 million. Adjusted profit before tax was up 
25% to £390.7 million, 17% on a like-for-like basis.

**Taxation**

The Group’s income tax charge was £86.7 million (2021/22: £72.2 million). The adjusted
income tax charge, which excludes the impact of tax relief on items excluded from
adjusted profit before tax, was £90.5 million (2021/22: £72.3 million), resulting
in an effective tax rate of 23.2% on adjusted profit before tax (2021/22: 23.0%).

Going forward we expect the effective tax rate on adjusted profit before tax to 
increase to c. 26% in 2023/24 reflecting the increase in the UK corporate income
tax rate.

**Earnings per share**

Earnings per share increased by 24% to 60.4p. Adjusting for items excluded from 
adjusted profit and associated income tax effects, adjusted earnings per share of
63.6p grew 16% on a like-for-like basis.

**Cash flow**

| £m | **2023** | **2022** | 
| **Operating profit** | **383.0** | 308.8 | 
| Add back depreciation and amortisation | **64.6** | 63.7 | 
| **EBITDA** | **447.6** | 372.5 | 
| Add back impairments and loss on disposal of non-current assets | **11.5** | 2.4 | 
| Movement in working capital | **(48.9)** | (94.8) | 
| Defined benefit retirement contributions in excess of charge | **(10.6)** | (21.4) | 
| Movement in provisions | **(1.4)** | (1.7) | 
| Other | **14.8** | 10.1 | 
| **Cash generated from operations** | **413.0** | 267.1 | 
| Net capital expenditure | **(46.0)** | (42.5) | 
| **Operating cash flow** | **367.0** | 224.6 | 
| Add back cash effect of adjustments^(1) | **3.1** | 2.4 | 
| **Adjusted****^(1)** **operating cash flow** | **370.1** | 227.0 | 
| Net interest paid | **(12.6)** | (7.0) | 
| Income tax paid | **(93.9)** | (57.1) | 
| **Adjusted****^(1)** **free cash flow** | **263.6** | 162.9 |

1.         Adjusted excludes the impact of substantial reorganisation and acquisition-
related items cash flows.

Cash generated from operations was £413.0 million (2021/22: £267.1 million) as we
continue to be focused on our cash conversion. Higher EBITDA (earnings before interest,
tax, depreciation and amortisation) more than offset continued inventory investment
to support revenue growth. As a result, adjusted operating cash flow conversion 
was 92.0%, an increase of 21.2 percentage points.

Net interest paid increased by £5.6 million to £12.6 million due to our higher net
finance costs.

Income tax paid rose to £93.9 million from £57.1 million due to taxable profit being
higher than 2021/22 with more significant growth in higher tax jurisdictions. Also,
we made some small overpayments which we expect to utilise in 2023/24.

Net capital expenditure increased to £46.0 million from £42.5 million as we continued
to focus our investments on optimising our DCs, implementing new product management
systems, augmenting digital commerce capabilities and strengthening our technology
platforms.

Capital expenditure remained at 1.3 times depreciation, in line with our typical
maintenance capital expenditure levels of 1.0 – 1.5 times depreciation. We anticipate
capital expenditure in 2023/24 to be £50 – 60 million including planned spend to
deliver our 2030 ESG action plan such as c. £4 million to begin decarbonising our
DC in Beauvais, France.

Given our focus on conserving cash, adjusted free cash flow, which excludes cash
outflows of £3.1 million (2021/22: £2.4 million) related to substantial reorganisation
costs and acquisition-related items, was £263.6 million (2021/22: £162.9 million).

**Working capital**

Working capital as a percentage of revenue increased by 0.7 percentage points to
21.8% (see Note 10).

We continue to monitor receivables collection closely, which remains our greatest
short-term liquidity sensitivity. We continue to limit our exposure through tightening
credit policies, including short payment terms and low credit limits for new customers,
and seeking payment commitments for overdue balances before releasing new orders
to existing customers, which have helped lead to higher cash generation. The acquisitions
increased trade and other receivables by £39.7 million and, combined with the impact
of the weaker sterling exchange rate, led trade and other receivables to end the
year at £692.0 million (2021/22: £594.3 million).

Gross inventories increased by £100.8 million to £660.0 million with £32.2 million
due to the acquisitions. We have extended our product offering in Americas, started
to add inventory into our extended DC in Bad Hersfeld, Germany, and invested in 
inventory across the Group to ensure continued availability. Our inventory turn 
has decreased slightly to 2.6 times from 2.7 times, but improved from the 2.4 times
delivered in the first half. Inventory provisions have increased by £14.0 million
to £43.7 million, £2.5 million due to the acquisitions and the balance mainly due
to the slowdown in sales of electronics products.

Overall trade and other payables increased to £658.9 million from £584.1 million
with the acquisitions accounting for £35.6 million of this increase. The remaining
increase reflects the growth in inventory and the impact of the weaker sterling 
exchange rate.

Looking forward we continue to manage our working capital position actively and 
remain focused on receivables collection. Given the more uncertain economic backdrop,
we are restricting our investment in inventory to products which we know, from utilising
data from our customers’ website searches, will sell quickly. However, we understand
that demand and supply dynamics can change quickly and that our systems and orders
need to remain agile to be able to adapt according to market forces. We will continue
to invest in the right inventory to ensure that we remain well positioned to maintain
service levels and deliver strong growth as the markets recover. We pay our suppliers
to terms and continue to work with some of our larger suppliers to improve terms
where possible.

**Net debt**

Our net debt was £113.0 million (see Note 8), only £70.9 million higher than at 
31 March 2022 as a result of our strong cash generation despite the acquisitions
increasing net debt at their acquisition dates by £234.3 million.

On 24 October 2022 we refinanced our £300 million sustainability-linked loan (SLL)
facility which had a maturity of November 2024. The new SLL facility is for £400
million with a five-year term on broadly unchanged rates and we increased our lender
base by three to a total of 11 banks. The SLL has a lender option accordion of up
to a further £100 million and an option for the Group to extend for up to two further
one-year terms subject to individual lender approval. £24.2 million was drawn down
at 31 March 2023 and subsequently repaid in April 2023. This SLL together with the
£160.4 million of private placement loan notes, form our committed debt facilities
of £560.4 million.

The Group’s financial metrics remain strong, with net debt to adjusted EBITDA of
0.2x and EBITA to interest of 34.2x, leaving significant headroom for the Group’s
banking covenants of net debt to adjusted EBITDA less than 3.25 times and EBITA 
to interest greater than 3 times.

**Return on Capital Employed (ROCE)**

ROCE is the adjusted operating profit for the 12 months ended 31 March 2023 expressed
as a percentage of the monthly average capital employed (net assets excluding net
debt and retirement benefit obligations). ROCE remained strong at 30.8% up from 
28.7% last year.

**Retirement benefit obligations**

The Group has defined benefit pension schemes in the UK and Europe, with the UK 
scheme being by far the largest. All these schemes are closed to new entrants and
in Germany and Ireland the pension schemes are closed to accrual for future service.

Overall, the accounting deficit of the Group’s defined benefit schemes at 31 March
2023 was £36.4 million compared to £12.4 million at 31 March 2022.

At 31 March 2023, the UK defined benefit scheme had an accounting surplus of £34.9
million (2021/22: £24.9 million). Under the scheme’s matching asset portfolio, the
decrease in the value of assets was mainly offset by the decrease in liabilities,
which was mainly caused by a 2.1 percentage points increase in the discount rate
to 4.9%, leading to the increase in accounting surplus. Under the scheme’s rules
the Group does not have an unconditional right to any surplus that may arise on 
the scheme and so the accounting surplus has been restricted to £nil. An additional
liability of £26.2 million has been recognised which is equal to the present value
of the agreed future deficit contributions under the revised recovery plan.

The triennial funding valuation of the UK scheme at 31 March 2022 showed a deficit
of £36.4 million on a statutory technical provisions basis. A recovery plan, which
replaces the previous recovery plan, has been agreed with the trustee of the UK 
scheme and deficit contributions of £11.1 million per annum will be paid with the
aim that the scheme is fully funded on a statutory technical provisions basis by
30 September 2025.

**Dividend**

The Board intends to continue to pursue a progressive dividend policy while remaining
committed to a healthy dividend cover over time by driving improved results and 
stronger cash flow. The Board proposes to increase the final dividend to 13.7p per
share. This will be paid on 21 July 2023 to shareholders on the register on 16 June
2023. As a result, the total proposed dividend for 2022/23 will be 20.9p per share,
representing an increase of 16% over the 2021/22 full-year dividend. Adjusted earnings
dividend cover for 2022/23 was 3.0 times.

**Foreign exchange risk**

The Group does not hedge translation exposure on the income statements of overseas
subsidiaries. Based on the mix of non-sterling denominated revenue and adjusted 
operating profit, a one cent movement in the euro would impact annual adjusted profit
before tax by £2.1 million and a one cent movement in the US dollar would impact
annual adjusted profit before tax by £1.2 million.

The Group is also exposed to foreign currency transactional risk because most operating
companies have some level of payables in currencies other than their functional 
currency. Some operating companies also have receivables in currencies other than
their functional currency. Group Treasury maintains three to seven months hedging
against freely tradable currencies to smooth the impact of fluctuations in currency.
The Group’s largest exposures related to euros and US dollars.

**NON-FINANCIAL KEY PERFORMANCE INDICATORS (KPIs)**

We have eight non-financial KPIs to help measure progress against our strategy and
the commitment of our 2030 ESG action plan – For a Better World. To provide greater
transparency on our performance in the period, a summary of our progress is included
below with further details available in the ESG section on our website: www.rsgroup.
com/esg.

| ** ** | **2022/23** | **2021/22** | 
| **Carbon intensity ^(1,2)**
(tonnes of CO_(2)e due to Scope 1 and 2 emissions / £m revenue) | 1.7 | 2.4 | 
| **Carbon emissions^(1,2)**(tonnes of CO_(2)e due to Scope 1 and 2 emissions) | 5,000 | 6,300 | 
| **Packaging intensity^(1,2)** (tonnes / £m revenue) | 1.63 | 2.01 | 
| **Waste**^(1,2,3) (% of waste recycled) | 76% | 75% | 
| **Group rolling 12-month Net Promoter Score**^(4) | 49.6 | 50.6 | 
| **Employee engagement** | 78 | 75 | 
| **Percentage of management that are women** | 30% | 32% | 
| **All Accidents** (per 200,000 hours) | 0.40 | 0.53  |

1.         Metric excludes data from acquisitions completed in 2022/23.

2.         KPIs are on a constant exchange rate basis and are updated to reflect
changes in reporting methodology and emissions factors.

3.         Prior year % of total waste recycled updated following supplier data 
corrections.

4.         We have updated our NPS methodology from 1 April 2022 to make it more
representative of our customer base. The changes made are to weight NPS by percentage
of orders; separate out B2B from B2C customers, with B2B becoming our primary metric;
and customers that opted out of marketing can be included in the survey. The prior
year has not been restated.

**RISKS AND UNCERTAINTIES**

The Board has overall accountability for the Group’s risk management, which is managed
by the Senior Management Team (SMT) and co-ordinated by the Group’s risk team. The
principal elements of the process are: the identifying of risks, their assessment,
their mitigation and then the ongoing monitoring of these risks.

The Group has a defined risk appetite, which has been adopted by the Board, and 
is considered across three risk categories: strategic, operational and regulatory/
compliance. These three categories use both quantitative and qualitative criteria.

**Principal risks and uncertainties**

The principal risks and mitigations disclosed in the 2023 Annual Report and Accounts(
pages 40 to 47) were:

1.     Talent and people resources

2.     Change in customer, supplier or competitor behaviours

3.     Geopolitical environment

4.     Delivery of strategy: The RS Way

5.     M&A activity

6.     Organisational resilience

7.     Cyber security breach / information loss

8.     Future global pandemics

9.     Macroeconomic environment

10.  Climate change

11.  Legal and regulatory compliance

Two changes have been made to the RS Group’s principal risks from those disclosed
in the 2022 Annual Report and Accounts. These are:

·      the removal of the risk that the UK defined benefit pension scheme cash requirements
are more than the cash available. This is due to the reduced likelihood and lowered
impact of this risk driven by ongoing improvements to the scheme funding position
and the de-risked cash flow driven investment strategy.

·      including a risk to reflect the increased importance, and associated risks,
of the Group’s activity to acquire value-accretive businesses.

In addition, we have amended the principal risk associated with the COVID-19 pandemic,
disclosed last year, to a more general risk associated with the risk of a pandemic
more generally.

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