Can you just go back one slide, please? Don't want to, don't want to save all the really exciting stuff. As you can tell from our headline numbers that we'll talk about in a minute, it's been relatively challenging. But what you won't be able to see in the numbers, but what you'll hopefully pick up throughout this presentation today, is that it's been a dynamic and very exciting six months from me personally.
And what I'd hoped I'd find when I started to look under the RS hood, which was good people and a great growth opportunity to deliver excellent outcomes for all stakeholders, is exactly what I've found. And notwithstanding the challenging short-term markets that we're experiencing at the moment, is actually a great time to be at RS.
I'm joined today by Jane Titchener, who's been our excellent interim CFO since the end of April, and who'll continue to support our new CFO until the end of this year, before moving back into a permanent role in the group. I'd just like to take this opportunity, Jane, to thank you on behalf of all of our stakeholders, for the excellent work that you've done, stepping in and up to the role at short notice, and for your continuing commitment and enthusiasm.
I'd also like to thank you personally for all the support you've given me in the last seven months, and I look forward to continue to work with you as you transition to your new role in strategic performance management at the end of the year.
I'm also joined by Kate Ringrose, who many of you will know from her time at Centrica, where she was latterly the CFO. She joined us five weeks ago. It's been busy. She's been a great addition to the team, and she brings a wealth of experience with her. Aside from gloating about South Africa's recent cricket successes and Rugby World Cup wins, she's already having a positive impact on the group.
I'm really looking forward to working closely with Kate and the rest of the team, to build on the progress that we've made at RS over the last few years, and to accelerate realization of that exciting opportunity that I see, and I think we all see at RS. Presentation should take about 40 minutes. I'll do a quick overview of the first half.
I'll ask Kate to say a few words. Jane will then take us through the numbers, and then I'll wrap up with a quick look at the underlying strategic and operational progress we've made in the half, and to share a bit more color with you about the exciting medium and long-term opportunity that exists here. And then we'll open it up for questions. I know everybody's busy, so we will try and get you away by ten o'clock. So now we can look at the numbers. Although financially, it was a difficult first half, we are making good underlying progress.
We delivered a resilient performance in markets that were all a bit more challenging than we anticipated at the beginning of the year, and we've also been trading against strong comparators.
Against that backdrop, revenue was down 1%, but 8% down on a like-for-like basis, although digital was only down 5%, and we saw good growth, continued growth, in both RS PRO and value-added services. We continued to deliver double-digit operating margins, and although declines in PBT and EPS were significant, return on capital employed still remains well above 20%. The board's recommending a 15% increase in the interim dividend, reflecting our through cycle progressive dividend policy, and of course, confidence in the group's long-term growth and cash generation prospects.
Despite challenging markets and the impact on our numbers, we also did a lot of good things in the first half, and we have good underlying strategic and operational operating momentum.
We're balancing continued investment in growth accelerators with more effective cost management, and we're planning actions this year that will deliver more than GBP 13 million of annualized savings, most of which will come next year. And through the work that we're doing to reduce duplication, simplify and improve our physical process and digital infrastructure, we see opportunity to further optimize our cost base, while still delivering and executing our growth strategy. I'm pleased with the long-term potential I see in Risoul and Distrelec, and the Distrelec integration is pleasingly ahead of plan.
And perhaps most importantly, after seven months, I see that we are executing broadly the right strategy and that our exciting growth opportunity is real. We're a strong global player, operating in fragmented markets that have attractive through cycle and underlying fundamentals.
Through investment in growth accelerators, there is a potential for continued and sustained outperformance over time here. There is additional opportunity for through cycle margin expansion, and from improving operating leverage and driving operating effectiveness, and we're cash generative with a robust balance sheet that supports accelerating realization of our strategy and enhancing our underlying organic growth.
We're beginning to see tighter focus, more alignment, better prioritization and improved execution across the group, and we're making good underlying progress, despite those short-term market challenges I've referred to. So that's a quick trot through what I think has been actually, on underlying basis, a pretty good six months for RS. But before we move into the numbers, I thought it would be helpful if Kate would just stand up and introduce herself and say a few words about what attracted her to RS.
Admittedly, though, after five weeks, her impressions are presumably initial.
Good morning, everyone. I'm really delighted to be here, and thank you to Simon for the very kind introduction. I chose to join RS principally for three reasons. It's an organization that has a very positive impact on a global scale in keeping industry moving, and I like being part of enterprises that really matter. I see significant potential within both the markets in which RS serves, as well as within the organization itself, and the board and the exec team have deep, relevant experience, and Simon's got a very strong reputation as a CEO, and I'm really excited about the plans for the business.
I also believe I can bring a lot of value to the journey that we're on.
I joined RS from Centrica, which is a large, diversified business, and in which I held a variety of financial and operational roles in various parts of the group, and in that, gained a lot of experience across the years. In the last five weeks, I visited a number of countries, I've visited distribution sites, and I've been very encouraged by what I've seen and the people I've met. The opportunity is very much how Simon and the board described it to me. I think one of the great things that we have in RS, though, is our will to get after those opportunities.
Yes, the markets are tough, they're challenging, we've got a lot more to do, but this is a growth business with many levers, and that makes it very exciting for an incoming CFO.
So that's probably more than enough for me for now at this stage. You know, as Simon said, before I introduce Jane, she's been extraordinary at stepping into the CFO role on an interim basis and a huge support to me in the coming weeks. So a huge thanks to her. I very much appreciate you being with us today. I'm very much looking forward to getting to know you all and to meet you all in the coming weeks. And at this stage, I'm going to pass on to Jane.
Yeah. Thank you, Kate, and good morning, everybody. So let's then look at our financial performance. On Slide 7, we've summarized the performance during the first half of the year, during what's been a challenging trading period against a strong set of comparatives. Revenue declined by 1%, including contributions from our newly acquired businesses. We saw an 8% decline in like-for-like revenue, a reflection of that difficult trading backdrop.
We delivered 10.8% adjusted operating profit margin, reflecting lower volumes and dilution from our acquisitions, offset by savings in our underlying cost base. We generated GBP 26 million of adjusted free cash flow, with investments in working capital, particularly inventory, through the first half. And as Simon has said, our ROCE remains over 20%, despite only 1 quarter of trading contribution from Distrelec.
Some key metrics at the bottom of the slide to highlight: Industrial Product and Service Solutions revenue, which accounts for 80% of group revenue, was down 2% like for like. Our electronics category declined by 24% like for like, reflecting the electronic cycle. Our digital channel performed better than the overall group, down 5% like for like. We've seen good growth in our service solutions revenue due to greater uptake of digital solutions, and RS PRO has outperformed with the proposition of a quality alternative to the main branded ranges, continuing to resonate well with our customers.
On Slide 8, we outline the revenue bridge, comparing revenue in the first half with the same period in the prior year.
So in 2022, 2023, we benefited from strong product availability when global supply chains were constrained, mainly in electronics, and we estimated the benefit impacted revenues by about 5%. The 8% like-for-like decline was largely the result of reduced volumes in challenging market conditions and customers trading down in their mix of products, with inflation contributing a small single-digit increase.
On our acquisitions, Risoul contributed a full 6 months of revenue and Distrelec 3 months following the completion of the acquisition at the end of June, and there was a small impact from fewer trading days and foreign exchange movements. On Slide 9, we show our adjusted operating profit margin bridge. So again, we've estimated that the unwind of the inventory benefit from the first half impacted our operating profit by about GBP 26 million.
In the first half, we saw a 180 basis point decline in our gross margin, of which 140 basis points was the dilutive impact of the acquisitions. The acquisitions dropped through to a 30 percentage point dilution to adjusted operating profit margin. Adjusted operating costs reduced 4% like for like. We flexed down our variable costs and taken targeted actions to reduce overheads, which have more than offset cost inflation.
A large proportion of our operating costs relate to our people, and in June, we awarded a mid-single-digit pay increase, which included a higher-than-average increase for our non-management populations.
In response to the current trading environment, we're taking action to reorganize our cost base, which will deliver around GBP 30 million of savings on an annualized basis, with around GBP 2 million in the first half and GBP 8 million in the second half, and most of the remainder in the next financial year. The costs of delivering these savings are estimated to be GBP 15 million, and our first half numbers include GBP 4 million of this, the balance to be taken in the second half.
Despite the short-term environment, we continue to balance medium-term growth opportunities with some reinvestment of savings into our growth drivers, improving the search capability on our websites, developing common customer relationship management processes and systems, becoming cloud-based, and enhancing our distribution network. Let's move on then to our regions, starting with EMEA on slide 10.
Performance in the EMEA region has been resilient, given the challenging market conditions. Like-for-like revenue fell by 4% with margin discipline, improvement to operational efficiencies and tight cost control, allowing us to take advantage of our scale, resulting in the like-for-like operating profit margin growing by 40 basis points. We've maintained share with our higher lifetime value customers and have seen smaller value transactional customers reduce as inventory availability normalizes. We've increased the relative share of our growth drivers, digital, own brand RS PRO and service solutions.
In the markets where our offer is broader and more rounded, including the UK and France, where we've had our strongest performance, with Germany in particular, negatively impacted by the cycle due to relatively high exposure to electronics. We've seen good gross margin discipline with some gains from price inflation.
We're improving our operating efficiency and leveraging the variable cost base where appropriate, resulting in operating margin gains. Distrelec's trading reflects the trading environment slightly below expectations, particularly with its exposure to Germany and the electronics market. But we've got detailed plans for integration, and we remain really confident in the delivery of cost savings and synergy benefits from cross-selling opportunities.
So going forward, we continue to build on a solid foundation with more focus on higher value customers and growth drivers, and continuing to improve our operational efficiency and leveraging our scale in the region. So let's move on then to the Americas on slide 11. Like-for-like revenue in the Americas fell by 14%, including the unwind of the benefit of last year's inventory availability.
In the Americas, our product range is narrower than in EMEA, and we've got a greater proportion of our business in automation and control, and a higher proportion of smaller manufacturers in our customer base. Their purchasing patterns are more correlated to the electronics cycle. So as with many in our industry, we've seen customer destocking, which is also depressing volumes. Our like-for-like operating profit margin reduced by five percentage points as gross margin gains from the prior year reversed, and we've seen more competitive pricing in electronics.
We have taken action to rightsize the cost base, including a reduction in headcount, with benefits delivery into the second half. Revenue performance at Risoul has been better than expected, as Risoul benefits from stronger order book and good inventory availability versus peers, and the integration of Risoul is progressing well.
So going forward, we're focusing on our value-add areas of digital, service solutions and own brands, and operating with a more flexible cost base, leveraging our value drivers to move to a more strategic relationship with our customers. On slide 12, we detail our performance in Asia Pacific. So revenue in Asia Pacific was down 18% like-for-like, against very strong period of growth in the prior year. Trading in APAC continues to be impacted by our exposure to the electronic cycle and continued macro uncertainty, particularly China.
Customer destocking also impacting volumes. Our operating profit margin reduced to 2% during the first half, affected by high operational gearing, given our relatively small scale in the region. Gross margin gains from the prior year are unwinding, and we're seeing more competitive pricing activity, particularly in electronics.
We've taken action to adjust our cost base, including a reduction in headcount to deliver benefits in the second half of the year. We're investing in local customer fulfillment centers to improve service and reduce freight costs, and focusing on developing our service proposition to capture opportunities with larger industrial customers. So we'll move on now to the cash flow and balance sheet, which is on slide 13. So starting then with adjusted free cash flow. So just to orientate everybody here, free cash flow doesn't include the acquired balance sheet of Distrelec.
So we generated GBP 26 million of adjusted free cash flow in the first half of the year, which is down GBP 86 million from the first half of last year.
40% of the reduction related to lower EBITDA, and the balance is largely due to the timing of inventory intake, which is weighted to the first half of the year. This was impacted by two dynamics: The first, a change in our supplier performance, which is rapidly improving as supply chains unwind. Shorter lead times mean that new orders are being fulfilled more quickly than the prior year, and we're also seeing the release of built-up back orders, meaning delayed orders from suppliers are also received.
Those backlogs were highest in electronics products, where minimum order quantities required to protect availability are higher than across other parts of our industrial range. At the same time, customer demand is declining, given the market backdrop impacting the rate of throughput of inventory sold.
Over half of the inventory intake in the first half was in fast-running products, which has already begun to unwind into cash in the second half. And now on to the balance sheet and working capital. So again, just to orientate you, these will include the acquired assets and liabilities of Distrelec. So working capital as a percent of revenue increased by 3.5 percentage points, with about half of this relating to acquisitions. Gross inventories increased by £139 million from the year-end, again, approximately half as a result of the acquisition of Distrelec.
And our inventory turn in the first half was 2.3 times, and that's already improving as we take action to reduce our order book and sell through our current inventory. Inventory provisions increased by £35 million, and £23 million of that, again, was from Distrelec.
And just as a reminder, our inventory provision is calculated on an inventory cover basis, so it reflects the estimated number of years of sales we have of inventories in each product. So the increase in the inventory in the first half is mechanistic. It reflects the effect of the slowdown of sales volumes, which increases our estimate of the timeline to sell the inventory, which in turn moves the inventory through our provisions categories.
Capital expenditure was 1.2 times depreciation as we continue to invest in optimizing our distribution centers, implementing product and customer management systems, and strengthening our digital and technology platforms. Our net debt increased to GBP 502 million, with the acquisition of Distrelec increasing net debt by GBP 333 million.
So now let's move on to slide 14, with some themes to consider for the second half. So as we move through a changing cycle, market conditions continue to be challenging and uncertain. However, the factors below are relevant in considering likely outcomes for the second half of the year. So gross margin was more robust than we anticipated in the first half, and we have still had some benefit from price inflation.
Assumptions we made on gross margin at the prelims for the full year still hold, and we continue to expect to see prior year inflation to unwind, and our acquisitions will have a dilutive impact.
On costs, as we've already outlined, we've taken action to manage our cost base more effectively to deliver GBP 30 million of annualized cost savings, and we expect to invest around GBP 11 million of cost investment in the second half and see realization of about GBP 8 million of benefit from the actions we've taken in the first half. There's also a further GBP 9 million of operating profit benefit from the second half of the prior year.
We're anticipating that our full-year interest charge will be around GBP 30 million, reflecting higher net debt position, and our tax charge will be around 26%, reflecting the increase in the UK tax rate.
On cash, the average lead times mean that actions to reduce our inventory order commitments will lag the declining sales, but over half of the inventory build in the first half was in fast-running products, which is already beginning to unwind in the second half, which is benefiting cash flow. And as a result of this cash flow, cash generation will be more weighted towards the second half as we reduce our inventory take and sell through our current inventory. Capital expenditure will be in line with previous guidance, including continued disciplined strategic investment.
Further guidance points, including trading days, foreign exchange, and a summary of those operating cost actions, is included at slide 28 of your pack. So thank you. I'll hand back to Simon now.
Thanks, Jane. Not bad for an interim CEO, CFO, even. So thanks, Jane. Now let's have a look at some of that positive strategic and operational momentum that we're delivering in the first half. Before I get into that, the last seven months certainly haven't been great for my personal carbon footprint, but pleasingly, as an organization, we're making great strides in improving our emission reduction, and therefore, that's more than made up for by this great RS organization. But it's been important that I visit as many of our sites across the regions as possible.
I've been to all three regions, sometimes more than once, and I've been talking and listening to our people, understanding more about our business, our markets, the opportunities for us, the projects that we're working on, the progress that we're making, and also the barriers to executing more effectively and more quickly.
And I'm pleased that everything I've seen and heard supports and confirms that the RS Group's strategic ambitions and potential are real, that we're mostly working on the right things, if not quite as effectively as we could be, but I've also seen significant, significant opportunities to improve operating performance and execution. But before we get into that, I also thought it would be helpful if I shared with you on slide 16 something that is an external indicator of what's really going on in our markets.
So although we are one global business, at a country market level, markets, products, and the verticals that we serve are nuanced. However, when you aggregate everything back together, as this chart, which plots composite PMI against RS's like-for-like growth over the last 20-odd years, as you can see, composite PMI is actually a very good indicator for what our revenue on our like-for-like trading performance does.
When you look into the regions, they do behave differently, in part due to the specific economic cycles that happen in their major markets, but also because exposure to various different process industry verticals is different, and our product mix does vary.
Product mix is important, particularly because electronic components, which make up about 20% of the group, has its own structural cycle, which is driven as much by capacity and demand as it is over production, and that operates slightly differently to broader industrial PMI. As you heard from Jane, actually, EMEA is performing well versus PMI. Our industrial revenue continues to outperform, partially offset by electronics, which has been and continues to be very soft across the globe due to weakening orders, increased availability, and extensive customer destocking.
In the Americas, there is slightly less correlation to local PMI because we're more exposed in that market to the automation and control industry, and we're also exposed more to small OE high complexity low volume production manufacture.
Both of those areas are more exposed to the electronic cycle than the rest of the group. So we continue to look in the U.S., at how to better diversify our customer verticals and product range, and over time, I expect the U.S. to continue to migrate more towards the European model. In Asia Pacific, again, as Jane said, it is less correlated to broader PMI, principally because it's a less mature market for us, and it has a much higher exposure to electronics. The key takeaway is, when you add everything back together, there's a really good correlation between our organic growth and what PMI is doing.
Generally, as you can see from this chart, RS outperforms through the cycle with higher peaks and lower troughs than PMI.
And as you can see, and as you will know, the last six months, PMI has been moving in a way that reflects the challenging markets in which we continue to trade. And actually, when you step back and look at what our revenue has done on an underlying basis, we have performed broadly as we should. So on slide 17, notwithstanding the difficult trading environment, I'm pleased to report that we've made progress on all of the key priorities that I talked about at our preliminary results presentation in May. We've been focusing hard on operational effectiveness.
This is where the whizzy slides happen. So please bear with me.
Because, as following a sustained period of strong trading post-COVID, it feels like there is an opportunity to optimize our cost base through reducing complexity and improving efficiency, and still accelerating execution. We're making good progress in lots of areas. We are aligning the organization's leadership. We have made some great key hires to enhance our already strong management team.
We've streamlined the senior management team and decision making by creating an aligned and empowered executive committee that is responsible for prioritization, effective resource allocation, and driving greater focus and agility and operational and financial performance. We've created a broader advisory group to shape, challenge, test, and lead our strategic priorities and cultural evolution. We're reviewing our operating model. We are developing a simplified and clarified target operating model to improve our operating effectiveness, agility, and scalability.
We're enhancing the group's performance management metrics and processes to ensure that we can exercise effective operational oversight, provide better information, and share best practice to improve alignment and collaboration across functional, regional, and country teams. We're improving strategic alignment and underlying processes. We have improved our strategic planning process to make it more bottoms up, more action-oriented, and more aligned.
We're increasing our process focus, defining those processes that are common across the group, those that are common but with local optimization, and those that are local, and ensuring that they are effective and that we continuously improve them. We're also clarifying what we mean by the evolution to a purpose-led culture, and this is a priority for our CPO.
We've already completed our base culture assessment, and we are in the process of defining the culture we need to have to support acceleration of our strategy, and the clear actions and tools and processes that we'll need to implement the change to make it effective, all of which will accelerate more effective execution. We're also continuing to invest in improving our operational leverage and drop-through for when our market returns to growth, as they surely will.
We see significant medium-term benefits from increased scale with the recent acquisitions of Distrelec and Risoul, enhancing our existing footprint in key markets such as Switzerland and Mexico, and with the effective integration of these and other acquisitions, which allow us to improve and better leverage our existing physical, digital, and process infrastructure. We're also optimizing our cost to serve. We're right sizing the cost base.
As you've heard from Jane, we've reorganized and reduced headcounts already in Americas and Asia Pacific. We're accelerating the integration of Distrelec into H2, and we'll continue to maintain tight but balanced control over overhead. We continue to optimize our supply chain and distribution footprint. We've already further improved the performance of our major distribution center in Germany, materially increasing our SKU capacity there and processing efficiency.
And we've increased our flexible local fulfillment capacity with third-party customer fulfillment centers in Asia, and adding further capacity in Spain and France. And we're investing to ensure that we are both more agile and can scale more quickly. We are now a cloud-based business, having completed the migration of our operating systems with over 100 back-office, middleware, and front-end applications to the cloud, completed in the first half.
We're reducing application and process complexity, and all of this is helping us accelerate into a recovery. Then finally, and not least, despite this difficult short-term environment, we continue to invest in those growth accelerators that move RS from being a transactional distributor to a product and service solutions provider for our targeted customers and our strategic suppliers. In the last six months, we've materially improved our digital and customer experience.
We've introduced sophisticated upgrades to our websites, which is now an AI-enabled tool and contains search capabilities powered by Google technology. This enhanced website is now effective in the UK and Ireland, and is already showing positive improvement, particularly in conversion and basket size, and we'll be rolling this out across the world in the second half.
We're also developing and launching specialist customer management tools, initially in Germany, which will be deployed globally over the next 18 months or so. We've enhanced our product offering, not just by the additional 50,000 SKUs, stock SKUs, that we've launched in the last six months, but also an additional 5,800 RS PRO products, with nearly 4,000 of those particularly targeted at our American customer base, where we also continue to invest in the RS PRO brand.
We've rolled out our now 20,000 Better World sustainable product range in 15 countries across the globe, and we see lots of opportunity for further expansion in that range.
We're also focusing on continuing to develop and scale our value-added solutions that we're so well positioned to provide for our customers that they value and that they're prepared to pay for. Ex-inventory solutions have been expanded out of the UK and Ireland across the whole of Europe. We're improving the RS Integrated Supply offering to make it more scalable while retaining flexibility for customer optimization, and we're developing service solutions that pull through more product revenue. All of which supports acceleration of customer capture, loyalty, and ultimately, share of wallet.
And, of course, our cash generation and our strong balance sheet allowed us to enhance our organic growth. I visited both Risoul and Distrelec recently, and I'm very pleased with what I found.
Good and strategically important businesses, high-quality people, and much that both organizations can learn from each other, and that RS can learn from them. I'm also comfortable that we were value-disciplined, and that over time, both Risoul and Distrelec will accelerate realization of our strategy in a very value-creative way.
Integration at Risoul, which ticks a number of our strategic criteria, is progressing well, and we're benefiting from strong markets in Mexico, and see the opportunity to cross-pollinate technical expertise in Risoul into our Americas business. And our relationship with Rockwell has strengthened further, and with their support, we've already opened small operations in two additional territories.
To Distrelec, which also ticks a number of our strategic criteria, although we only completed the acquisition at the end of June, integration is proceeding well and is ahead of schedule, with more potential benefits identified than initially anticipated, excuse me, and with lower cost to deliver them. With Distrelec, as Jane has said, experiencing some of the slightly challenging market conditions that we ourselves are experiencing in Europe, we have taken the decision to accelerate our integration and associated cost reduction into the second half of this year.
I am comfortable that these high-quality acquisitions are accelerating the realization of our growth strategy. So, after seven months, and notwithstanding a challenging first half, we're really well positioned. We've got good, hardworking, committed people. We're a strong global player operating in fragmented markets that have attractive underlying fundamentals.
We're relatively unique as a multi-channel, high-service MRO distributor and service solutions provider, and we're digitally enabled and very data rich. We have an opportunity, therefore, for sustained outperformance through continued investment in our growth accelerators, enhancing operating leverage, and driving operating effectiveness. We delivered a resilient performance in H1 in challenging markets, but balancing continued investment with cost management actions, some implemented and more to come.
We have very positive strategic and operational momentum, and we're already beginning to see tighter focus and more prioritization and improved execution across the group. This gives me great confidence that the next few years are going to be an exciting and a rewarding time to be part of the RS Group. So with that, I'd like to open up the meeting to questions. There are some people with mics dotted around the room.
If you could raise your hand, one of the mics will get to you. If you could then state your name, the institution that you represent, and then your question, we'll do our best to answer it. Let's start with the lady in the second row there.
Thank you. It's Annelies Vermeulen from Morgan Stanley. Thank you for taking my questions. So, just on the cost savings, could you talk a little bit about how much of those are related to making the cost base more flexible? And to then, to what extent are you- do you- are you confident you'll be well positioned when those volumes return? And if you're able to talk a little bit about how much is related to headcount or your distribution centers or technology investments, you know, what could that look like?
And sort of a sidestep, same, part of the same question, what does that mean for your margins going forward, these, these, cost savings that you're making? And, is there a new kind of margin target we should be thinking about over the medium term?
That's my very long first question.
Thank you, Annelies. I'll try and take most of those, although I'm not going to answer the target margin question. I mean, if we thought we needed to change long-term view of target margin, we would have said so. I think we're very comfortable with what we have out there today. In relation to these cost savings, I mean, the vast majority of our costs are people, so a good chunk of these are people. They are permanent, and this is reflecting a piece of increased efficiency.
It's reflecting a piece of acquisition integration, so a chunk of it is accelerating the acquisition of Distrelec, and it's generally just making us fitter for improved conversion. They're permanent. These aren't sort of interim things.
They are changes in the structure and the way we work, and that means that clearly, there's opportunity for more accelerated margin improvement when the business turns for growth. And, I still think there are opportunities for further improvement in operational effectiveness over time, but we'll tell you about those as and when we do them.
Thank you. And then just secondly, on the destocking piece, we've had relatively mixed messaging from other businesses with U.S. industrial exposure. Do you have a view on whether that destocking piece is now coming to an end, or is that something we could continue to see through your fiscal second half?
So I think I'd love to be able to tell you a data-based and accurate view of that. Intuitively, we are closer to the end of destocking than we were. However, there is something else going on, particularly in automation and control, because actually, book-to-bill rates in the manufacturers are still operating at below one. So not only have you got destocking going on, you've got a slowing in some of the A&C world going on, too. So I mean Fastenal were out the other day, Arrow were out. I think people are all struggling with it a bit.
Most people are saying first quarter, first month next year, so our last quarter this year.
That feels a little bit optimistic, probably to me, but, I would expect to see that destocking sort of finish crudely at some stage in the first half of next year. It's also important to recognize that sort of that's only 20% of what we do, a bit less than that. We don't see the similar dynamics in industrials, so there wasn't the same stock build. And while there's, you know, a little bit of fluctuation in inputs and outputs, it's only in electronics where we see that, real stock unwind happening, because that's where it was built in the first place.
Okay, and then the last one, just very quickly on your comments around the gross margin, your expectations for the second half. Do you have a view on what pricing will do through the second half? Do you think this low single digit will continue, or, or should it be more flat?
Do you want to go at that?
I mean, again, difficult to predict accurately, but yeah, I think, I don't think we'd assume any deflation. And it's, it's low double single digit inflation at the moment. I think flat is probably-
We certainly don't-
as good an assumption as any, but it, I mean...
We don't see any-
No deflation
... any pricing pressure in industrials. Electronics, there is a bit more pricing pressure, but it's eased since we were here six months ago. But we don't see any deflation out there, so.
Thank you.
Thanks. Yeah.
Good morning, it's Rory McKenzie from UBS. In the bridges on slide 8 and 9, you called out the trading benefit in the prior year period. Can you just clarify what that is and how you estimated it, and why you're calling it out as separate to the volume and gross margin declines that you're pointing to investors? And then secondly, just to follow up on that pricing point, can we get a figure on the pricing contribution to revenues in Q1 and Q2? With this gross margin dilution getting worse in H2, as you've described, can you explain the dynamics there?
Because last year, you had the bigger price inflation contributor in H1, so why is it getting worse this year in H2? I'll take those two first, please.
Jane, do you want to take the trading benefit last year and why we've called it out?
Yeah. So I mean, we talked about this at the prelims, where we were definitely seeing a positive impact on our results last year from us having inventory availability, and we were definitely seeing customers that we wouldn't normally see come to buy that inventory from us, and those customers have kind of not stayed with us once inventory levels have returned to normal across the channel. So, you know, how do we calculate that? It's an estimate of the impact of those customers who we saw on a transient basis, who are now not coming to buy from us.
I mean, it is an estimate. It's, you know, but that's broadly how we've done that across the three regions.
So that's why we're calling it out, because it is quite different business from what we'd normally see in our underlying business, and we're just trying to give you a feel for what that impact that had, year-on-year.
Pricing contribution to revenue, low single digit?
Low single digit, yeah.
Gross margin getting worse in H2. Jane, do you want to take that one?
Yeah, I think it's a bit of a... a little bit of mix. So, so I mean, gross margin's down in the first half, but quite a big chunk of that is from the acquisitions, and we haven't seen as much of the inflation unwinding through the margin as, as perhaps we were expecting to see. So I think that proportion between inflation and acquisitions will kind of change in through the second half. That's certainly what we're expecting as the kind of price inflation unwinds.
Yeah, I think it's, you know, if you look at price inflation on our inventory sort of becomes, you know, the stock that you're selling-
Yeah
Then you see that, that gross margin.
It's a little bit of mix. So which inventory selling, which product lines is that in, and is that, are they the ones that are flowing through? So but I think we'd see more of that in the second half.
Thank you. And then, Simon, appreciate the chart of RS Group organic growth against Composite PMI explains where we are today. As you moved into this year role, do you not also find that quite sobering in terms of the past outperformance the group has delivered? I know we're never going to move away from the customers having their own cycles-
Mm-hmm
... but what was your view on the outperformance that the company has delivered even in the past five, six years? Have you changed your view of that at the moment?
No, if I ever haven't, and actually, perhaps I didn't make it clear enough in the slide. If you look at that chart, and you look at the correlation between RS and PMI, you see that RS outperforms at the through the cycle, i.e., the peaks are higher and the troughs are lower. All of that's real. I do think that the last 18 months, because of the timing of the electronic cycle, we did have this one-off trading and benefit, which was partly driven by stock availability and partly driven by input cost by price inflation in advance of input cost inflation.
And when you back that out, actually, you know, that's what I'm saying that's why I'm saying I think, you know, we absolutely outperform the cycle.
PMI is a good indicator of what's going on, and that's why in our first half, once you back out that one-off trading benefit, actually, this business did exactly what it should do.
Thank you.
Thanks, Rory. Should we take... Yeah, David. Thank you.
Good morning. It's David, David Brockton from Deutsche Numis. Can I ask two as well, actually, one related to Rory's question?
I think you can ask at least three if Annelies is going to-
2, 2 or 3, but they're quite long. So just trying to get to more detail in terms of the unwind of prior year one-off purchases. Can you just give a bit more detail in terms of what you're seeing in terms of customer count, average order frequency, and average order value, just how those have moved, if you still monitor those? And then the second question relates to sort of cash flow and capital allocation. Appreciate a lot of the pressures on the first half will unwind in the second half, and the business still looks relatively lowly levered.
Can you just touch on your views in terms of deploying more capital into inorganic expansion, and also sort of views on sort of shareholder returns directly as well, please?
Sure. Thanks, David. On customer accounts, yeah, we do monitor, of course. You know, I would expect, as we increasingly focus on strategic customer, customers with long lifetime values, that actually our customer count may drop a little, and it has been dropping a little. It goes back to what Jane has been talking about, those transient customers that pop up on the website, they buy one thing, and they disappear.
They're coming less frequently and less often because there's less of them. So, customer count down a bit, but actually customer count in the customers that we care about are up, and outperforming our broader, market. So that's all good. Order frequency and order values ticking, order values up, ticking up a bit, but there's a bit of mix change going on.
Yeah, acquisitions.
And we've also got some acquisitions in there, but, nothing of concern in those KPIs, which we do monitor, and actually, all going in the right direction based on strategically what we're trying to do. In terms of, balance sheet, capacity, absolutely, you know, this is a cash generative business. We have a very strong balance sheet. We continue to look at opportunities for, to invest both in organic growth and inorganic growth, and we have a fairly clear and stated, capital allocation policy, which we'll continue to comply with.
You know, I think when you look at our share price, however, I always think it's important, when you're looking at the alternative ways of deploying your surplus capital, to bear in mind your own share price, because that is an implicit investment that you could make.
It doesn't benefit all shareholders versus investing in other things that deliver long-term sustainable value. So we need to keep an eye on it. Certainly, I don't think there's any immediate plans to change that capital allocation policy and to look at buybacks, but we do have, of course, the facility to do it if we need to, and we'll continue to look at the external world where we think we can create a lot of value through selected acquisitions at the right price, but we will also continue to have one eye on what would investing in our own shares would do. Thanks, David. Yeah?
Hi, it's James Roach from Barclays.
Hey.
I'll start with going back to the trading benefit you flagged as well. I mean, how confident are you that that's the extent of it, and that there's also no, you know, potential sort of one-offs and overearning within the industrial side as well?
Jane?
Yeah, I mean, look, it's an estimate. It's very difficult to absolutely isolate everything which is completely, you know, out of the ordinary course. But we definitely saw more of this customer behavior in electronics, particularly in electronics, 'cause that's where there were the most product shortages and most products in allocation. That wasn't the case within our industrial range, so, you know, it's much less likely that there was that pattern of behavior within our industrials, and therefore, much more focused within electronics and automation.
Some of our automation and control products behaved in a very similar way, so we would categorize those as industrial, but actually we've treated them as electronics for the purposes of kind of doing this analysis.
So, I mean, I think it's gonna be a small amount if there was any outside that core of electronics and industrial.
Honestly, James, we are actually quite sophisticated in the way we monitor purchases of products and who buys them within the group. We have a bunch of people and a tool that looks very hard at inventory planning against prior purchases, current market environment, what's going down, what's going on in the external world. Usually, generally, we are very accurate on about 85% of the products that we sell.
Over the last 18 months, and it's all in electronics, the accuracy dropped from 85% to about 75%, and that's because we were actually selling things that we don't really sell that much of, because they were sitting on the shelves. Often, they've been provisioned.
I think, therefore, we're pretty comfortable that whilst it might not be dead accurate, anything else that is outside of the numbers that Jane has shared is just normal trading. So I'm pretty confident we don't have any more one-offs to burn out.
Okay, thanks so much.
Thanks.
Thanks very much.
Thanks, James.
On cost savings, if I can, I mean, how has your thinking evolved over time there? I mean, did you think you'd have to do some at the full year, or have you had to think a bit more heavily about the quantum of that as we've progressed through the year?
This wasn't triggered by any particular financial performance or current market or anything like, like that, James. This is about us continuing to get much more operationally effective. A number of these plans were in place at the beginning of the year, and with the acquisition of Distrelec, frankly, a scrub of the integration plans identified that we could actually accelerate the integration of Distrelec and the merger of the two businesses much more quickly than had originally been thought.
So, so this is all about continuing to get the organization fitter, because I think, you know, we have had a couple of years of very strong trading post-COVID, and things are not quite as toned as I would have hoped they'd be.
And that's why I say there'll also be a continuing, I suspect, focus on operational improvement, because we still have very clunky processes. We still are inconsistent in how those processes are deployed. We are not fantastic at driving the headcount efficiencies that some of our process improvements suggest. So I think, it's a waffly answer to say that there's more to go at to get us fighting fit. We're a lot fitter today than we were six months ago, and we'll be a lot fitter at the end of the year than we are today.
Great. Thank you.
Thank you, James. Bye. Any other questions?
Yes.
Hang on, you're head of IR.
There's some online.
Thank you.
Can you give us an update on how the new European warehouse is progressing?
I can do that personally. I’ve been a couple of times to Germany now. My first visit to Germany in April, I stood on the picking line, picking packages for shipment. And I, even as an idiot chief executive who’s never worked as a picker in a distribution center before, I could outpace the automated software that told me what to pick and what to put in a box. I was back there in September, and I now cannot outpace that picking software. Why do I share this story with you? There has been significant improvement in Bad Hersfeld, and Bad Hersfeld’s operations, SKU capacity, and that will continue.
There’s more potential there.
I am learning that when you build new warehouses or when you incur significant expansion costs in warehouses, and you upgrade and develop the warehouse management system, it does need to be tuned. It's a bit like an F1 racing car. You do have to tweak the spanners. You have to get all the systems operating effectively together. We are doing that and continuing to do that much more effectively in Bad Hersfeld than we did. It's not perfect yet, but it's a lot better than it was six months ago.
I've got a few. Have you met customers and suppliers, and what are the key messages they're giving?
Have met both customers and suppliers. The key messages are, we very much value what you do. We value the high service, availability that you give us. We like your shift to creating closer relationships with us by building value-added services, that we value and are, are prepared to pay for, and we like the fact that you're increasingly clear on what you're trying to do. Suppliers actually say the same thing.
As the high-service industrial MRO process industry, MRO provider, they understand what we're trying to do, and we understand much better how we can develop value for our customers that are also their customers in a positive way. Occasionally, RS has been a little less focused on what it is trying to do. On occasion, I think we've talked about being a high-service, broad-range electronics distributor.
That's not helpful for suppliers because it's a partnership relationship that both we, as the distributor, and they, as the supplier, need to benefit from. To do that, you've got to be very clear on the customer set that you're pursuing and the product range you therefore need to carry to help them. So I think some of the clarity that we've introduced over the last six months has been positively received by both customers and suppliers.
Question about exit rates.
Look, I think it's not getting any worse, but it's not feeling like it's fantastically better. I mean, how you get into the exit rates, you know, second quarter was slightly worse than the first quarter, but who knows? I mean, I think it's difficult for... If I could predict what industrial production was going to do, I probably wouldn't be here. I'd be on a beach somewhere.
But what I can tell you is the organization's much fitter at the end of six months than it was, and that all the work we're doing, which is balancing strategic investment for accelerated growth with, you know, being realistic about cost structure, is continuing, and I think we're well placed, frankly, in any environment.
And one thing you do know about this business and this industry, it will return to growth. It will... The cycle will turn, and we're a lot closer to that cycle turning today than we were six months ago, so.
Can you give a little bit more color on Distrelec, please? Why is it performing behind plan? Have you lost any customers?
So I think a bit. So no, we haven't lost any customers. In fact, we're gaining customers. We're actually cross-converting customers from Distrelec into RS and using... And also in certain instances, transferring RS customers into Distrelec systems. So no, all the customer transfer is very strong. And in fact, if you look at the Distrelec underlying performance, and you compare it to our own underlying performance in the same countries, it's broadly the same. Actually, Distrelec's doing slightly better than the RS, than the RS companies are.
So I'm very comfortable with Distrelec's good acquisition. We're accelerating the integration. Probably we should have planned a more rapid integration at the outset.
Frankly, when I came on board, that's one of the first things that we did was to turn that integration plan into a proper full integration plan, and we're getting on with that now. The benefits that we'll generate from Distrelec are materially greater than we had in our own investment case, and actually, the costs to deliver them are going to be cheaper, too. So for me, Distrelec's going to be a good one.
How has the rebranding gone in the U.S.?
I think it's gone. I mean, we are rebranded. It's done. When I made a reference a little earlier to continued investment in the brand in RS, it was actually to RS Pro. So one of the important things that we need to do to push RS Pro in America is to improve the brand recognition of RS Pro amongst our traditional customer base. So that's actually what we're investing in. The rebranding is all done.
Thank you.
Thank you, head of IR. I hope those were questions that were online. Any, any other questions? Okay, well, two minutes late. Thanks very much, and thanks for attending. Thanks for your continuing interest, and we look forward to seeing you in six months or so. Thank you.
Thank you.