Clock says it's 9:00 A.M., 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 multi-year 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 post-pandemic 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 return to more sustained growth. Onto 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're focusing on going into 2026. 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 A.M. Now, as you know, at RS, we like to start all meetings with a health and safety and a values moment.
First I'd like to point out the fire exits to those that are here in the room, that 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 high-vis vests. At RS, safety isn't just about physical well-being, it's about mental well-being too. 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 km by week two, and we have extended it. I fully expect the 200 of us to walk over 10,000 km this month, each kilometer a message of awareness and support. This is an example of what RS is all about. It is our values in action. It is one team doing the right thing by coming together to raise awareness and make every day better for ourselves and for each other. Into the presentation itself, fiscal year 2025 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 inline performance.
We are executing against our plan effectively, with clear prioritization, improved accountability, enhanced agility, and as a result, much improved delivery. We are performing as we should, delivering more predictable outcomes even in difficult markets and continuing to take market share. We are 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. We are beginning to see the benefits in our underlying operating metrics of our continued strategic investments, 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. We have done all this and made all this progress despite the difficult market backdrop that we have 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 two 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 multi-year action plan to deliver it with much more systemic, 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. We're more process-focused, and that's highlighting opportunities to harmonize, automate, and improve delivery, through more rigorous program and change management.
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've 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 post-pandemic, 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. It also shows that PMI data throughout this period has been below 50 and certainly has been in decline since Q2 2023.
Despite this, our revenue performance this year returned to its more close correlation with PMI and has even started to outperform in the third and fourth quarter of this year, despite PMI softening a little. This reflects some of our strategic initiatives beginning to deliver. Whilst it is difficult to measure market growth and share in the high service distribution space, the proxies that we use, which tell us we are 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. Most importantly, we are performing predictably. Part of this is because in 2025, we were much more effective at managing the things that we control.
As you hear, as you'll hear from Kate shortly, our growth accelerators continue 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 actually our headcount reduced by over 4% during the year. 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.
We are driving greater efficiency through reducing complexity, removing duplication, and this will continue as we improve collaboration and begin to harmonize our processes. 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. All of this demonstrates that we are able to exercise greater agility in our execution, investment, and cost management. On this chart, we are 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 spent. The light red is the capital expenditure, and the darker red is the OpEx .
In customers, we have got cleansed and much more granular data and have rolled out improved tools to enhance our customer understanding. In products and suppliers, we have launched major systems improvements to accelerate new product introduction. In solutions, we have replatformed and upgraded our principal digital procurement solution, and we have enhanced our service offerings. In customer experience, we have developed an upgraded digital platform for rollout across the group and launched an extensive systems upgrade that will ultimately allow real-time delivery tracking. 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. All of this highlights the significant strategic and operational progress that we have made this year.
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, 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. Let's move on to what's behind the numbers. This slide summarizes the results for the 12 months to 31 March 2025. 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 the Americas and Asia-Pacific as PMIs improved, and we traded against weaker comparators. Our adjusted profit before tax reflects the market drop 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. Our full-year dividend increases by 2% to GBP 0.224 per share, consistent with the progressive dividend policy. Our digital like-for-like performance of negative 2% largely reflects the market decline.
As Simon mentioned, we can see material declines in online footfall for some of the key words we are 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 is 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 are 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 am 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 2023 and 2024 inventory provisions have been restated for an adjustment in the US 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 2025 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 a stronger dollar. Average order value declined slightly, whilst average order frequency increased marginally. In our three product categories, facilities and maintenance and other industrial categories grew 3%. Automation control, electrification, and testing measurement fell 2%.
These two categories cover around 80% of our group revenue. Our weakest category is in semis and passes, cables, and connectors, which declined 8%, reflecting weak end markets. We have been active in managing our cost base, and as you have 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 have updated the cost bridge that I have shown you in previous sessions 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 have rebased 2023-2024 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 costs 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 two years, which is above our GBP 30 million target.
This leaves us with an ongoing cost base before in-year one-offs of GBP 930 million-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. Our operating cost, including one-off costs and benefits, finished the year at GBP 969 million. Right, 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 region, 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. Within the region, we saw France outperform, helped by more resilient industry verticals. The U.K. suffered from weaker demand since November, and Germany was impacted by a higher exposure to manufacturing and automotive industries. In the 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 Dominic Hunter and Trident, and we're pleased with the success that we're having with RS Pro in the region. Operating profit increased by 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 investment 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. Our cash generation, balance sheet, and debt facility headroom provide plenty of capacity for continued strategic investment. Our clear capital allocation policy has not changed. First, we prioritize organic investment to support organic growth, especially in strengthening our physical, system, and process infrastructure. This will increase next year and continue at around GBP 35 million -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 have executed or targeted to cover a cost of capital within three years. Third, we believe in sharing cash generated with shareholders through a progressive dividend policy, and where we do not have sufficient value creation opportunities in organic and inorganic investments, we will return excess capital to shareholders. Our full-year dividend in 2024-2025 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 one to two times net debt Adjusted EBITDA, depending on prevailing market conditions and acquisition opportunities. Right, finally, to give you some help on factors to consider when you are thinking about full-year 2026.
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-GBP 45 million per annum. We anticipate similar cost inflation to that seen in full-year 2025 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 will continue to do so in full-year 2026. 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 -GBP 15 million. Higher depreciation from our capital investment spend and further normalization of our employee incentives will be about GBP 5 million -GBP 10 million of increase. We are proactively managing costs and have demonstrated our ability to flex expenditure as required. Remember, as shown as our cost bridge slide on slide 11, that our underlying cost base for 2024-2025 was GBP 965 million, stripping out one-off cost benefits and expenditure. We'll continue to target cash conversion to exceed 80%.
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. With a final word on tariffs, we are not currently experiencing any visible direct impact from tariffs, and we are closely monitoring this evolving situation. We are fully engaged with our suppliers on their response and to support our customers in meeting their needs. 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 supplier 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. 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. 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 creation for all of our stakeholders. What have we done and what are we planning to do? At the core of our wheel, core to everything we do, is people. 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. We did see a small drop in our October engagement survey, although 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.
Pleasingly, our most recent survey, which is just coming to a close now, is showing significant improvement in engagement in all areas. 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 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 a more effective, cost to serve.
In 2025, 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. 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.
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 is about strengthening our technical product offer through value-sharing partnerships with strong suppliers and by developing more curation for our customers. In 2025, 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. This is particularly true in RS Pro.
Moving into 2026, 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. All of this is creating greater flexibility and allowing 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 Kate 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.
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 enhanced value through our solutions and our services. We continue to strengthen and tailor our customer journey for a seamless omnichannel customer experience. In 2025, 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 Release One actually launched in Americas just after the year-end. We've also launched an extensive systems upgrade in EMEA and Asia-Pacific that will, whilst causing some initial disruption, ultimately allow us to deliver real-time delivery tracking to our customers.
Going into 2026, we will be further enhancing our digital commerce platform and begin rolling it out in Europe. We will also launch the real-time tracking functionality to customers that we have done all the base work to enable and start to better tailor our customer experience using, again, our extensive proprietary data that is all enhanced by artificial intelligence and machine learning-enabled platforms. Of course, we are 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 2025, we made really good progress in a number of areas. In addition to commencing the conclusion of the Distrelec Central Distribution Center, we have also expanded our capacity and capability in our DCs in both France and in the U.S.
We have begun the simplification and upgrading of our technology stack, retiring over 40 applications during the year. We have now commenced our middle and back office transformation planning. In 2026, 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. On the process side, global end-to-end process owners will be defining harmonized processes for application across the group and will begin driving standardization where it makes sense. We are 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.
Bringing this all back together, we're 12 months into our ambitious multi-year 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 four years to the areas in which we'll be driving improvement. Remember, Kate referred to that GBP 35 million-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.
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 four years. 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. 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 remain confident that once PMIs recover, structural industry trends will return our markets to growth.
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. As we do that, we will increasingly become sustainably first choice and drive sustainable value creation for all of our stakeholders.
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. Thanks to the efforts of the RS team, we are making real and significant underlying strategic and operational progress. This is giving us increasing 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 brings us to the end of the formal presentation.
I'm gonna 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 online. Give me two seconds to go and sit down, then stick your hand up and, oh, thank you.
Good morning. It's David Brockton from Deutsche Numis. Can I ask two questions in relation to tariffs, please? Thanks for setting out the minimal direct imports that you think the business has into the US. 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. Secondly, in relation to tariffs, it's very encouraging that the business has seen improved performance through Q3 and Q4. 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? Just wondering what you're seeing on a ground level there. Thanks.
Thanks, David. I'm gonna give Kate a bit of time just to check the origin data for our Americas business.
The reason that you see relatively little direct import into America is a lot of our suppliers will import from where it is manufactured into their own stock holding center in America, and then will ship from that to us. We are generally, all bar about 5% of our North America revenue is actually tariffed, but quite a lot of it comes from all sorts of different places. Have you managed to dig that number out yet?
Yeah, I mean, and when we are looking at country of origin, bearing in mind this is country of origin into the US, not necessarily directly to us, if that makes sense. In terms of China, it is about 34% as country of origin. Then we have got sort of Germany and the rest of Europe at about 40% combined and then it's a range of other places after that. Thanks.
Yeah. So, do we see any evidence that tariffs are driving accelerated growth and pull forward? We do not 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, 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, I think maybe just standing back a little bit from tariffs, we do not 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. Being a broad MRO-based distributor, global with global operations, and an ability to operate, you know, we have two and a half thousand suppliers, an ability to switch product and provide alternatives across the globe, I think positions us quite well in a tariffed environment.
Thanks very much.
Hi, Karen.
Hi. Thank you for, thank you for your presentation, Karen So from JP Morgan. I have two questions, please. One is around the delta of the GBP 31 million organic investments versus the range you mentioned around defer 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 35-40 million for next year. 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? Thank you.
I think I'll start and then hand it over to Kate, Karen. Just on the 31 million of strategic investments we've made, being at the lower end of the range we guided to, it's sort of two 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 de-risking it by moving bits and pieces that are around. A little bit 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. 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 wanna say on this year's spend and then the free cash flow, Kate?
Yeah, I mean, really what we're reflecting here, Karen, is, you know, having taken a really good look at what projects were live, you know, what is the interdependencies that we have on the projects that, you know, are 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 want 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. Pacing is important 'cause otherwise there's a risk you don't spend the money well. That's why we're looking to an increase certainly into this year. I'm guiding to kind of, you know, the lower half of the 35-45.
Somewhere between 35 and 40 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 forecasts, our metrics, you know, really a lot of measurement around DSO, DPO, you know, the inventory terms and the 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 a, like an additional system capability within receivables that just allowed us to do that better within year.
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, you know, I think it was around three days that we improved it by across the piece.
Thank you.
Hi, good morning. Annelise Vermeulen from Morgan Stanley. I have two questions as well, please. 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 two percentage points increase. Is that, you were 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?
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 are 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 know, 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? Thank you.
Thanks. Thanks, Annelise. On RS Pro and range development, one of the things we are, we now understand much better about RS Pro is that brand development's really important. And, you know, 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 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. That's always a constant balance that we are driving. We have much more data and knowledge now that allows us to influence what products we do actually source with RS Pro. Of course, we are 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 for the RS Pro brand. Often it's done in conjunction with our suppliers, not isolated from them.
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. I think, you know, up to 20% over a number of years is the sort of target 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 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 are 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. I don't envisage a huge labor influx as we move into growth.
Thank you.
Good morning. Ryan Flood from Jefferies here. Three from me if I may. First one on, 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. Number two, you obviously have 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.
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? Thank you.
Competitive landscape. Now, it feels to us like we're taking share from the smaller local non-digital distributors really across the globe. We have seen one or two 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 are trading in, and that value tension is keen at the moment. 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. 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. Of course, you know, we are there to satisfy immediacy of need and availability, and that comes with a price. 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. We do not regard it as a major issue. Shareholder returns.
I mean, I think, pretty much consistent with what I said, you know, we've got a clear order of capital allocation and we hold to that. With regards to leverage, you know, we give guidance around, you know, broadly one to two times leverage is where we are. And absolutely, we're on the lower end of that at the moment. As we said, we're actively monitoring and looking at a pipeline of acquisitions. Those are the dynamics that we look at across the piece. Do we have good opportunities to deploy our capital in organic and inorganic? 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. 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 created 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.
Thank you.
Hi, it's James Rose from Barclays here. I've got three, if I may. The first is, I mean, do you have a view on what organic revenue growth could be for this year? And can you grow it 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 with larger customers seems to have gone a bit better in FY 2025. Is that something you can, you know, progress further in FY 2026?
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. Yeah.
Thanks, James. I, if you'll forgive me, I won't ask 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 are 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. We are very comfortable that the work we are 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 is probably something I'll get into trouble for doing. and if I knew, I'd probably be sitting on a beach drinking pina coladas, not sitting here 'cause I would be able to predict the future. What I can tell you is that our business, as we've demonstrated this year, can operate in pretty much any sort of environment. 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 are right, about large customers. We talked about focusing on high lifetime value customers, and we did grow our large customers, what, 6%?
Yeah, revenue in that group.
Revenue 6% last year. We would anticipate that continuing to grow, going forward. Our strategy is about focus on those high lifetime customers, but do not forget everybody else because there is still a big proportion of our business. Ensuring that, using the tools we have 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 have been working on, and we will continue to work on going forward. The U.K. is tough. I am just going to look at what the PMIs are doing. After actually quite a positive start to 2025, to our fiscal 2025 in terms of PMIs, they turned pretty rapidly, sort of in the last quarter of the calendar year, and they have not really recovered.
Now we are actually doing relatively well in that environment, but the broader market in the U.K. remains challenging.
All right. Thank you.
Good morning. It's Rory McKenzie from UBS. 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. Has that been a trend all year long? As you've dug into that, what does that represent? And I guess that brings in, in a way, a form of margin pressure, that mix changing.
Has that changed at all how you think about either your pricing or how you build your model for cost to serve? Thank you.
Thanks, Rory. Do you want to take the accounting one?
The dynamic around the inventory measurement, firstly, let's just answer the question as to why it is a prior year adjustment as opposed to an in-year. 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. This is not a change of estimate. This is when we have really gone in and rigorously looked at how the group policy was applied across the group.
There was an area where it had not been consistently and appropriately applied, and that related primarily to prior years, and therefore we have adjusted accordin gly. I think that is one.
Yeah. I think on the question, Rory, about average order value frequency, you are 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. There is a bit of that going on.
The other thing that's going on is we're coming off three years or two and a half years of post-COVID trading when a number of our product categories, supply chains were very difficult and constrained. 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. 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, it's not a massive margin headwind. It doesn't change our view of what those medium term margin targets can be.
Yeah. Morning. 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, you know, your view on sort of headroom and what competitive advantage that might give you in this environment? Thanks.
Thanks, Tom. Yeah, 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 a, 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 as they order. We're pleased with the progress that we're making and that will be closed by the end of June. 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 three cycle basis to build that capacity and also increasingly to automate it, which creates more capacity. Investments in the US 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. You know, it's difficult to estimate that specifically, but we've got 40-50% physical inventory capacity if we need it. It's slightly the opposite. We need to make sure we can continue to effect, to apply very effective inventory management and only build physical inventory into that capacity as and when we can sell it.
Hi, Sandra 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 eight months on from the CMD. Any change in thought on how that could be phased or any areas which are showing more promise than, than you would've thought, eight months ago? Thanks.
Thanks. I'll do Boltons and then I'll leave Kate to answer the answer to the question on the 150 basis points, which I might add my color to at the end. On Boltons, yes, absolutely. They have and always have been on the agenda. You know, we acquired Trident at the beginning of the year. Very pleased with that, fitting well into the business and performing very well. Yeah, I alluded to a good pipeline, but not necessarily an alignment of buyers and sellers' views.
We'll continue to monitor those and to see what happens over the year. The strong pipeline's pretty strong at the moment, I suggest. Have our views on GBP 45 million changed very much?
Let's just kind of repeat the orientation because I recognize there's a lot of numbers that sort of fly around. Originally, we talked to a GBP 13 million target and then we updated that to an additional 100-150 basis points, which in this presentation today I, for ease of reference, converted to looks like around GBP 45 million. Of the GBP 13 million target, we've already delivered that. From last year and this year, we've delivered GBP 38 million in total. We're looking at a further at least GBP 15 million in full year 2026.
I would say with regards to what we've done, the easy stuff has been done, you know, where we've identified duplication, where we've got and identified the integration cost of savings and benefits. We've identified what they were well on the way and we've talked about Distrelec. We're now moving on to things that I would say are a little bit more tricky. You know, they do require more in terms of process investment, system investments, removing duplications of applications and the like. We're underway. It's a multi-year program, but we're underway and we'll continue to review what savings we can make and update you accordingly.
That's what I thought the Finance Director would say. 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 in when we can quantify it, we will. It is as a result of the work that we're doing. I'm not sure that it will need a huge amount of additional work. I think you should assume that that 45 million number is solid, and probably a bit conservative until the FD kicks me. We'll keep you informed as we see an opportunity to evolve that. Just conscious of it being 10:04 A.M., we've got some questions online, Lucy, that we can just,
I think most of them have been covered, but one of them is just to clarify, Kate, on the 13 million of in-year sort of cost savings. They talk, obviously they've identified the 5 million from the DC exit. Can you give more detail on the 8 million and is it repeatable, please?
Sure. I mean, you would always expect in a business like ours with the cost base, there is a degree of choices that you make within years to where and how you spend some of the more discretionary spend. You know, how you deal with vacancies, how you deal with travel, you know, how you make other in-year choices. That is effectively what that 8 million is, choices that we have made recognizing a more challenging market that we saved this year. In any year, we would look to do that. In any year, we would look around those different discretionary choices that we would make in order to manage our cost base. Are 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, you know, very vigorously. You'd obviously expect us to be able to do that.
Okay. Conscious it is 10:05 A.M. Thanks very much for your attention and your time, and look forward to seeing you all over the course of the year. Thank you.