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Edited Transcript of ECM.L earnings conference call or presentation 21-May-19 7:45am GMT

Full Year 2019 Electrocomponents PLC Earnings Presentation

London Jun 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Electrocomponents PLC earnings conference call or presentation Tuesday, May 21, 2019 at 7:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David John Egan

Electrocomponents plc - CFO & Director

* Lindsley Ruth

Electrocomponents plc - CEO & Director

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Conference Call Participants

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* Julian Charles Cater

Numis Securities Limited, Research Division - Analyst

* Kean Marden

Jefferies LLC, Research Division - Equity Analyst

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services Analyst

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Presentation

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Lindsley Ruth, Electrocomponents plc - CEO & Director [1]

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Good morning, everyone. I'm Lindsley Ruth, CEO of Electrocomponents. I'm joined today by David Egan, our Chief Financial Officer of Electrocomponents. And today, we'll cover our full year results for the year ended March 31, 2019.

Our theme today is going to be on our continued confidence and investment in the business to grow organically. So today, we're going to talk about our ability to differentiate, disrupt and deliver. But first, let's take a look at the results for this past year.

We've seen above market, sustainable growth and strong execution. So let's talk about a few facts. When I started 4 years ago, we talked about best-in-class through the cycle being a growth rate of 5% to 8%. This past year, like-for-like revenue growth was 8.3%. Our adjusted operating profit rose to 11.7%. That's from 6.7% 4 years ago, so 1.3% increase, aided by higher gross margin and tighter cost control. We've seen a 20.8% like-for-like growth in adjusted profit before tax and a 26.8% growth in adjusted earnings per share. We've also seen a further improvement in our Net Promoter Score, a measure of customer satisfaction within the group, of 5.1%. And just a quick note on that, that's improved by 34% over the last 4 years. And we've seen great progress, in particular, in Asia Pacific, in China and Japan, but not just those 2 countries, but around the world. Our IESA acquisition is performing well with strong double-digit revenue growth and accretive to the group margin. And last but not least, we've continued to generate attractive returns and, in particular, return on capital employed of 27.7%.

So our agenda this morning, and we know that everybody in the past, we'd maybe run a little bit late, so we're going to stay on schedule this morning. We'll be available after the call and after this presentation for any questions you have up until 10:15 this morning. David's going to go through our financial results and regional performance. Then I'm going to come back and talk specifically about how we can continue to disrupt and accelerate our business. And again, it's about -- it's all about differentiation, disruption and delivery for us moving forward. And then I'll touch on current trading and outlook.

David?

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David John Egan, Electrocomponents plc - CFO & Director [2]

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Thanks, Lindsley, and good morning, everyone. I'm very pleased to be reporting another strong set of results in terms of revenue, profit and adjusted earnings per share for the year to March 2019. These results include a 10-month contribution from the IESA acquisition, which was completed at the end of May 2018, and 2 months contribution from Monition, a smaller value-added solutions business that we acquired at the end of January 2019. These 2 acquisitions contributed GBP 27.7 million of revenue and GBP 6.6 million of adjusted operating profit in the year, and these have been excluded from all like-for-like comparisons.

Group like-for-like revenue growth was 8.3%. Both digital and RS Pro outperformed the group revenue growth rate. Digital, which accounts for 62% of our revenue, grew at 8.9%, whilst RS Pro, which accounts for 12% of revenue, grew at 11.6%. Our gross margin improved 50 basis points to 44.5%. The like-for-like improvement was a 20 basis point step forward. Strong revenue growth, higher gross margin and continued cost discipline drove a 20.8% like-for-like increase in adjusted operating profit to GBP 220.3 million and a 110 basis point like-for-like improvement in adjusted operating profit margin to 11.7%. Adjusted earnings per share rose 26.8% on a like-for-like basis to 37p. And finally, we are proposing a full year dividend of 14.8p. That's up 11.7% year-on-year.

Now I'd like to update you on our progress that we're making to drive operational excellence and best-in-class margins. Group gross margin was up 50 basis points to 44.5%. 40 basis points of this improvement was driven by acquisitions, primarily IESA. 20 basis points of improvement was like-for-like, and we saw a 10 basis point dilution from translational foreign exchange.

The like-for-like increase was driven by progress in 3 key areas: initiatives to improve product mix, with strong growth in higher-margin products such as RS Pro; activities to increase discount discipline across the business, with Allied, in particular, making strong progress on this front; and finally, actions to improve pricing with the rollout of our new pricing tool in our EMEA region during the second half of the year.

We will continue to focus on improving mix, discount discipline and price in order to stabilize and, where possible, improve gross margin to support our progress towards delivering our aspiration of a mid-teen adjusted operating profit margin business. Every business and every product category we operate in needs to be on a path to deliver at least a double-digit adjusted operating profit margin so that we can achieve this medium-term goal.

Our new venture, OKdo, will focus on the fast-growing single-board computing and Internet of Things markets. Single-board computing, which today accounts for around 4% of our revenue, has historically been a lower gross and operating profit margin category for the group. We believe with increased focus, we can increase scale and improve mix by selling more software and accessories to drive improved gross margin and, in time, a double-digit operating profit margin in this business. Moving forward, we will disclose any impact of driving faster growth in OKdo on group gross margin.

Our key focus remains driving operating margin. During the year, adjusted operating profit margin rose by a further 130 basis points to 11.7%. Acquisitions enhanced this margin by 20 basis points, and the balance of the increase was like-for-like. The like-for-like was improved by 3 key factors: strong revenue growth, higher gross margin and an increase in our adjusted operating profit conversion ratio, which rose 270 basis points to 26.3%. As you can see from the chart, we drove this improvement by tightly managing underlying costs despite continuing to invest in areas key to driving future growth such as talent and digital.

We delivered our target of GBP 4 million in cost savings from our PIP II program during the year, and we remain on track to deliver GBP 12 million of annualized savings by March 2021.

Overall, total adjusted operating costs were up 5.7% like-for-like, some way below revenue growth of 8.3%. And as a result, our adjusted operating cost percentage of revenue fell by 80 basis points to 32.8%. We will continue to invest to build a lean and scalable business capable of delivering a mid-teen adjusted operating profit margin.

Moving now to the summary income slide. Adjusted profit before tax was GBP 214.5 million, up 20.8% on a like-for-like basis. Excluded from adjusted profit are charges of GBP 19.3 million. GBP 13.1 million of this is primarily labor-related substantial reorganization costs linked to PIP II, GBP 4.4 million of amortization of intangible assets arriving on acquisitions and GBP 1.8 million of one-off pension costs. The adjusted tax rate was 24%, down on last year's rate of 28%, primarily due to lower U.S. tax rates.

From a cash perspective, cash generated from operations increased to GBP 184.2 million, with strong growth in operating profit more than offsetting investment in inventory to support revenue growth.

Working capital as a percentage of sales rose 200 basis points to 22.2%. 80 basis points of this increase relates to acquisition, whilst the balance relates to investments in additional inventory, some of which relates to inventory we brought in off the back of Brexit planning.

Our CapEx increased to GBP 50.8 million or 1.8x depreciation, and this is up from 1x in 2018. We began a GBP 40 million 2-year project to more than double the size of our Allied warehouse in the Americas. This program is on track, and we expect to be commissioning in the summer of 2020.

As a result of increased capital investment, an investment in inventory during 2019, adjusted free cash flow fell to GBP 84.5 million versus GBP 105.1 million in the prior year. Net debt increased to GBP 122.4 million, but we continue to have an extremely strong balance sheet with net debt to adjusted EBITDA of 0.5x.

Finally, on guidance. I've included a slide in the appendix of this pack with some key guidance points. You will see that we are guiding higher capital expenditure going forward. This is to invest to scale our range and build the right supply chain and technology infrastructure to support future growth. This will mean capital investment will rise to around GBP 80 million or 2.7x depreciation in both 2020 and 2021 before returning to a more normalized level in the outer years. Lindsley will cover this in more detail shortly.

Now moving on to the regional performance, starting with EMEA. Our EMEA region, which accounts for 64% of group revenue saw 8.5% like-for-like revenue growth during the year, with a broadly consistent performance across the 2 halves. We estimate that over 2/3 of our growth in EMEA has been driven by market share gains.

Looking at the sub-regional performance, we saw good like-for-like trends across all subregions. Northern Europe continued to see close to double-digit like-for-like growth trends, aided by strong growth in value-added solutions.

Pleasingly, we are also announcing a good turnaround in performance in Central Europe following recent leadership changes, with 10.3% like-for-like growth during the year.

Southern Europe showed a good performance with like-for-like growth of 6.1%, and this was despite a less-than-helpful market backdrop. We continue to strengthen our leadership across this region, with significant change in the Central European leadership team and new country managers appointed in both Italy and Spain during the year.

Our team in EMEA continues to drive new customer growth with activities and investment to improve brand awareness and digital marketing. They also focused on continuing to sell more to our customers by further enhancing our offer and value-added solutions proposition. The acquisition of Monition, which provides condition monitoring and IoT solutions for customers, further enhanced our capabilities in this area. We're now beginning to roll out these solutions from the U.K. across the broader regions.

Strong revenue growth, a modest improvement in gross margin and continued cost discipline drove 16.2% like-for-like growth in adjusted operating profit and a further improvement in adjusted operating profit margin to 16%.

Moving on to the Americas, which accounts for 26% of group revenue. We saw 8.6% like-for-like growth in the Americas during the year. We estimate that approximately half of our growth in the Americas has been driven by share gains and half by market growth. Growth moderated during the second half of the year to 6.3% versus 10.9% in the first half. Our team in the Americas remains highly focused on both increasing customer count and selling more to existing customers. During the year, we rolled out 25,000 new stocked products and 7,000 new RS Pro products online, and the distribution center expansion project will give us scope to accelerate this new product rollout going forward. We've also recently appointed a new sales leader in the Americas, and we are putting in place initiatives to improve our sales processes and drive increased sales force effectiveness in the region using some of the learnings we have from the U.K. We continue to have scope to drive improved gross margin by improving product mix and discount discipline. During the year, we made good progress on both these fronts, leading to a further step forward in gross margins. Strong revenue growth, gross margin improvement and continued tight cost control drove a 19.4% like-for-like improvement in adjusted operating profit and a further improvement in adjusted operating profit margin to 12.8%.

And finally, Asia Pacific. This region accounts for 10% of revenue and is made up of 4 similarly sized regions, Australia and New Zealand, Japan, Greater China and Southeast Asia. Overall, APAC saw like-for-like growth of 6.2% in the year. We saw strong growth and market share gains in both Australia and New Zealand and Southeast Asia. However, digital performance issues impacted growth in both China and Japan. Our key focus to date in Asia Pacific has been on driving improved customer experience and improving efficiency by streamlining our cost base and migrating activities into our new shared service center of expertise in Foshan, China.

Progress has been good. Customer experience scores continue to improve. NPS, Net Promoter Score, rose another 12% during the year. And the region is now profitable, generating a profit of GBP 3 million during the year, a significant step forward from the loss of GBP 22 million we saw back in 2016.

Moving forward, we are focused on 3 key areas to improve performance in both Japan and China. First, we're building our team and strengthening local leadership. We've recently announced a new leader from our Greater China business, who has a strong background in electronics and e-commerce, having worked for both Alibaba and Amazon in the region. Second, we will localize and improve the online experience. And finally, we'll continue to build a more local and relevant offer for the region.

If we can get these things right, I'm confident we can drive scale and improve profitability in this region over the medium term.

With that, I'll now hand you back to Lindsley. He's going to talk more about our plans to accelerate market share gains.

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Lindsley Ruth, Electrocomponents plc - CEO & Director [3]

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Thank you, David. So I'm going to talk briefly on how we can continue to disrupt and accelerate growth within this company. And I'll just preface this by saying I could talk for several hours on this, but at risk of turning this into a Capital Markets Day, I'll keep this brief. But if you have questions, I'll be around.

So look, I'm as excited today as I was 4 years ago. I think the market opportunity is very clear for us around the world. We commissioned a study last year of the market segments around the world that we serve. And if anybody's ever interested in seeing, it's about 145 pages, but it came to the same conclusion that this is a big market, we have a lot of opportunity. So you can see a lot of points on this slide around the size of this market. As we know, it's large, it's highly fragmented and we do know that our customers are looking for fewer partners. They're looking for more suppliers to be more of a one-stop shop, which is really important for us to be able to offer a broader range of product and a broader range of services and solutions as well.

Our competitors hasn't changed a lot, largely off-line, small, regional competitors, players, some that are focused on niche segments, could be safety products, could be mechanical products, bearings, et cetera, so very singular-focused in terms of product. So we've got a very broad offering on a global basis, which should help us for many years to come.

So what have we done so far? I'm not going to spend a lot of time talking about what we've done in the last 4 years, but just 6 quick bullets to talk about. 4 years ago, actually, 3.5 years ago, November of 2015, we stood up when we talked about how this business is more about execution than strategy. You can have all the great plans, but if you can't execute, you're going to fail. So we talked about execution. We talked about 3 priorities: putting the customer back at the heart of everything we do. We launched the Net Promoter Score and a customer satisfaction program at that time; then we talked about putting accountability and putting P&Ls back into the model, which we've done, and we've taken again our profit from 6.7% to 11.7%. And by the way, we're not done. As David mentioned, we still have the goal of getting to the mid-teens; and then we said we're going to operate for less. So we've taken out more than GBP 30 million out in costs.

And you know something? That's not going to go away. We're always going to have a focus. And in this business, I've said this many times before, there are 7 keys to distribution: buy low; sell high; turn your inventory more often; collect sooner; pay later; keep your operating cost down; and keep your suppliers and customers happy. All 7 of those areas, we've made progress on. And that's great. Traditional distributors do that, but we don't want to be traditional anymore. So what we're talking about today is how do we differentiate, how do we disrupt and how do we deliver? So that's our focus.

We also said we've got to accelerate our digital investment. So we today have close to 20 different agile teams. 4 years ago, we had 0. We spend around 4% of our revenue every year. So if you do the math, at GBP 1.88 billion, it's about GBP 73 million, GBP 74 million. I'd like to U.S. dollars because it sounds higher, so more than USD 100 million. We've further enhanced our offer, so we broadened our range in terms of value-added solutions as well as stocked product. Now that's going to increase substantially as we bring on more capacity, and I'll touch on that.

We've transformed our leadership. We don't have the leadership today for a GBP 2 billion revenue company. We have the leadership for a GBP 5 billion revenue company. And we plan to get there in the future, for sure.

We've stabilized the gross margin. When I first started, there was 1 topic that came up in every investor meeting, 67 meetings in May and June of 2015, and that was the question, "Do you think your model is structurally damaged around gross margin?" And I said, "No." And people say, "Well, why do you think that?" I said, "You know what, the older I get, the more I believe on what people do as opposed to what they say. So just watch what we do." For 3 consecutive years, we've improved our gross margin. We'd like to stop talking about gross margin and focus on operating margin. How do we get, again, to the mid-teens in terms of operating margin? But we have stabilized the gross margin, and we've improved our efficiency, and we've begun to build a lean, simpler, more scalable model.

So key benefits. As I mentioned earlier, our Net Promoter Score has increased by 34% since 2015, and don't forget that this is 20% of the management compensation, so it's a very important element of the compensation program. We've also -- from a digital standpoint, we've got 70,000 more visitors to our site versus 2 years ago.

Digital revenue growth last year was at 9%, so outpaced the growth of the group, 8.3% in terms of current outlook and trading. It's even higher than the average growth as a company so far this year. So hats off to our digital team.

RS Pro, which is our private-label brand, was 4 different brands 4 years ago. We combined it into 1 called RS Pro. We grew RS Pro last year north of 11%, so substantially higher than the group average growth. We've also invested in value-added solutions in OKdo, which we launched a new business called OKdo, which is focused around single-board computing and IoT, the maker movement, so we can take questions on that later. And RS Electronics into the Americas, so board-level electronics solution. We've done all that in the last couple of years and specifically the last year with OKdo and RS Electronics.

We have new leaders in 3 of our regions and 6 out of 8 of our subregions. We have also, as I mentioned earlier, 3 consecutive years of gross margin improvement, an 11-point improvement in adjusted operating profit conversion over the last 4 years. So what is profit conversion? That's the conversion of gross profit into operating margin. So again, over that period, like-for-like CAGR of 7%, adjusted operating profit CAGR of 27%. So significant was the outcome of that, significant market share gains. More than half our growth has come from market share gains and margin improvement. This doesn't happen on its own, and I'd like to thank those members of our team in the room, those listening on the call around the world for the hard work and effort to delivering these results. But we're not done yet.

So we've also obviously successfully driven market share. We've grown our customers. These are B2B customers. So on this slide, we've grown our customers, Slide 18, from around 550,000 customers, roughly 560,000 to 570,000 in 2016 fiscal year to 650,000 customers. What should that be if we look at by country and we'll use the U.K. as a benchmark? China, Germany, the U.S., Japan, we should have a lot more customers. What should that number be? 3 million, 5 million, 7 million. Pick a number. It's much greater than where it is today. So again, the scope of opportunity within this business is somewhat endless for many years to come. We have to make sure we're targeting the right customers. But again, if we use the U.K. as an example, we have more than 170,000 customers today. Then you look at Germany and say, "Gosh, maybe we should have 0.5 million in Germany, 0.5 million in China, 600,000, 700,000 in the U.S." We know there's a lot of opportunity out there. So really important. And even in the U.K. In the U.K., we have less than 5% market share. We believe we can get to 10% someday. So we still think we can double the amount of business we're doing within the U.K.

We also had the opportunity to sell more products to existing customers as well as new customers. So to go broader and deeper, this is a chart -- this is an example for Europe. This compares us against other distributors in their range. So you can see on the far left from an Electrocomponents or RS Components and IESA within Europe, the range that we have -- and you'll see where it's half shaded, we still have an opportunity to expand our portfolio in those areas, and we plan to do just that. So we can certainly sell more to our customer base by having a deeper range as well as a broader range across the board. So a lot of opportunity within those markets.

And again, I've said this many times before, but it's all about becoming first choice. And what does first choice mean? First choice means we're the first call of our customers. And we know that when you are first choice, in general, it means 25% more business from existing customers. And today, we're only first choice for around 24% of our customer base. So an opportunity, again, to improve customer experience, become more important to our existing customers, sell more, get a higher percentage share of wallet over time. So very focused on that. The price is large, and again, we have significant scope to grow that business.

So what are we doing? Again, this is all about differentiating, disrupting and delivering. And I think if you look at -- if you want to win the race and stay ahead, which is where we are today, I look at it and often say, "A digital quarter is equivalent to a year in the analog world." So every day is important. And in this business, you've got to keep 1 eye on the daily business and you've got to have 1 eye looking out 5 years. So we got to look over the longer-term horizon and say, "Where do we got them best? Where do we need supply chain, technology, inventory? Where do we have to invest?" But at the same time, you got to look at day-to-day and say, "Where are we performing? Who's not performing? How do we manage day-to-day performance, the sales organization, digital, making sure investing in the right strategy for paid search, pay per click, making sure we're getting the right returns?" So you've got to focus on the day-to-day business. It's very important. But you got to do that by looking through the front windshield into the future and be clear as to where you are going.

So if you want to win the race and stay ahead, you've got to continue to invest and be confident in those investments, and that's our theme today. So that's why we're investing, right, to make us different and things that will deliver sustainable outperformance over time.

So 5 areas and what we're calling differentiating to disrupt: number one, digital leadership. I'm going to come back and touch on this in a second, on each one of these 5 topics; two, technology transformation; three, best-in-class supply chain; four, unrivaled choice; five, value-added solutions. So our actions and investments that we're going to touch on, we'll take questions on today.

We will continue to invest in digital leadership. As I mentioned earlier, it's around 4% of our revenue per annum. We are increasing our CapEx to GBP 80 million. If you look at our investment, GBP 20 million of that will go into improving our range and our product and content excellence, which we call pace internally for product and content excellence transformation of our technology. GBP 60 million to expand our operations, warehouses and the supply chain, mainly in Germany and the Americas. And we will continue to roll out value-added solutions across the group doesn't -- that doesn't require a huge CapEx nor does it require a huge OpEx, which just takes time and resources, but we'll continue to focus on doing that across the globe.

And what are the benefits of this? Sustainable market share group. And our goal is to grow it twice, 2x the market. Progress towards the mid-teen adjusted operating margin and returns broadly consistent with our group return on capital employed, which, as you know, is 27.7% as we exit the year. So again, this is 1 eye looking 5 years out, staying focused on where we're going. And it's not really just 5 years, it's 10 years and 20 years, making sure that we can sustain the growth that we're investing.

So let's start with digital leadership. So what are we doing? Well, brand awareness is very important online. We have markets like China. China is a mobile-first market. So people aren't sitting around in desktops in China. They're on their smartphones, devices. They're on their tablets. And they're doing a lot of stuff outside of the office. It's very important that we have the right platform in that market, not just that market but around the world. We've seen an increase in traffic. I believe Guy is in the room. Where is Guy? So from 2% a couple of years ago to 7%, 8% today. So we'll continue to see more and more traffic go from desktop to mobile over time as we continue to enhance that site. We've got 3 agile teams that we brought together that are focusing on improving that experience on a worldwide basis. Digital marketing. We're also investing in pay per click, so with firms like Google and search engine optimization to make sure we're doing the right things to where we come up on the first page. Because if you're not in the first page, it's highly unlikely, even in your own personal searches, you're going to go to Page 2 or 3 or 4 or 5. So what is the benefit in terms of brand awareness and digital marketing? Well, faster traffic growth. As I referenced earlier, we've seen an increase of 70,000 visits per day over the last 2 years. Well, we'd like to see an increase substantially higher than that 2 years from now. So maybe we can double or triple that number, Guy, moving forward.

Mobile. Talked about that. We're investing to drive a best-in-class experience. Website speed is also really important. Think about, personally, you go to a website, you click and it just does the circle, the circle, the circle. After a certain period of time, you think something is wrong with that site so you click out. If you rewind 4 years ago, our site speed was at 7.9 seconds. Today, it's less than 2 seconds. So we went from worst-in-class to world-class over the course of 4 years. So congratulations to the hard work from our team on that front. And search. We're making it easier for our customers to find products they need. Find and search is where the journey starts, whether it's online or off-line. We have many customers that purchase off-line, but they start their search online. So research online is really important. If you say you have a blue LED, you don't want to show a green LED photo, right? So you got to be very accurate. And you'd be surprised how many companies actually would show a green LED photo. They show whatever the suppliers given to them. So content is very important, making sure you have accurate photos and images, making sure you have the right descriptions that are up-to-date is really, really important. And what's the benefit of this? The benefit is a best-in-class online experience, which drives improved conversion, improved conversion.

And then data and personalization. We're using our data to personalize a customer's online journey. Now we're not invading privacy. We're just looking at where customers go, and we're building a profile to understand the behaviors of certain customers. So if you're a customer that works in a glass factory, we know other customers that work in glass factories have searched for these products. So then we can begin to show and customize a journey that targets customers that are within a glass factory, knowing the products that they use. That's what personalization is. And we've done some betas. We've seen an increase of close to GBP 50 million in revenue in the last 12 months through personalization. We're going to be accelerating that moving forward, which is very important in the use of data. And we're investing quite a bit behind the scenes to be able to look at how we structure our data from an architectural standpoint and how we exploit that data to take data from data to information, to knowledge, to wisdom to be able to use that to make better decisions, better informed decisions as we move forward. And the key benefit of that is an increase in average order value. Our average order value over the past year increased around 4.6%, which is good, but we'd like to continue to accelerate that.

And those 3 benefits are the key to our sales online every month. It's a simple formula. Customer visits times conversion times the average order value equals your online sales for that particular month. You improve all 3, you've got a winning formula. So growing our customer count and improving our average order size has been a focus, will continue to be a focus moving forward. Very happy with our position in terms of digital around the world. We'll continue to improve that. We'll continue to add people within that organization. We'll continue to invest moving forward.

Technology transformation. What is this? Well, we're investing today to future proof and simplify our technology estate with a focus on a couple of areas. So one, user experience, as I talked about. So it was a digital perspective, but it's also internal for our own teams to make sure that we have the agile teams that are working on search, mobile, website speed and personalization but also internally within our systems to make sure that we have the right information from a customer relationship management perspective, that we can do quotes in an easy, effective manner. The second bullet is around PACE, which is product and content excellence, content management, to make sure that we have the right inventory management, profiles within our system, to make sure product is easy to find for our own people. If you do a quick search, you can find it. So that's all about optimizing the sales journey internally for ourselves. Supply chain, distribution center, management systems, warehouse management systems. We don't have a consistent solution internally, so we're really working on that, highly focused on that area. And data and technology infrastructure. So we're upgrading, we're replacing legacy systems. We do have a great system, an SAP as an ERP. So back-office solutions are good. Front-office solutions, you remember a few years ago, we wrote off hybris. And hybris was a bridge to nowhere, and so we've gone with our own systems, and we've built those out. So I think we have a very strong, solid front-office solution around the world, and that's what customers interface with us on a day-to-day basis. It's the middle office systems. We have a lot of legacy systems we have to take out. We're not talking about a huge investment. This is not an SAP-like investment moving forward, so there shouldn't be concern overall. There's something hanging out there in terms of this great, large capital investment coming down the road. There are no plans for that. Instead, we're looking at investing in the supply chain, and I'm going to come back and touch on that.

So what are the benefits of those? Future proofing our technology. We need a system that's not just good for the next 12 to 18 months, 24 months, but a system that's good for the next 10 to 15 years. Two, scalability. We need a system that's highly flexible, so as we do bolt-on acquisitions, we can bring them into our environment as we expand in greenfield and other parts around the world. So Eastern Europe or South America, we can easily launch new sites, et cetera. Some being that simple that allows us to make changes quickly, more effectively, more efficiently. We're operating in sprints, right? 2, 3 weeks, boom, make changes in the system, small changes instead of waterfall approaches of the past where you wait and make 300 changes all at once. And by the time you make the changes, there are more changes that needed to be made to the changes because it's 18 months down the road. So we're moving much faster. Flexibility. The flexibility to move to the cloud, to be able to have data stored on the cloud versus our own servers. The flexibility, instead of having to change 17 different systems, we make 1 change and it changes everything. Flexibly is very important. And, of course, medium-term efficiencies. We've got to continue to focus on operating for less.

So ultimately, technology transformation is about supporting growth and then driving improved returns. So I tell the leader of -- from a hardware standpoint, he's like Scotty in Star Trek, we just need more power, right? But we don't want to pay more.

Best-in-class supply chain. When I joined this company 4 years ago, one of the first person on day 1 that cornered me in the hallway, was a gentleman that was running our warehouses at the time and he said, "We've got a real problem. We're maxed in capacity. We've got to expand our warehouses." That was when we are GBP 1.2 billion in revenue, and as you've seen, we disclosed this year at GBP 1.884 billion in revenue. So we've added more than 50% on the top line in terms of growth. And -- oh, by the way, we actually closed a few warehouses. So there's always room to find more capacity. But I'll tell you this, and I'm not crying wolf, we actually do need to add capacity now. And we need to add capacity not because we want to grow at 5% per year or we want to grow at GDP, because we want to accelerate growth, and we see that market opportunity. We see the opportunity with what we're doing, knowing what we know and the momentum we have to go take a larger percentage of that market that we serve today.

So what are we doing? The Americas, we announced our distribution expansion back around 6 months ago. It's on track for completion. It's actually slightly ahead by a couple of weeks, although we had a lot of rain. Walls are up, the roof's on, the HVAC system was going in last week. It will allow us to 2x our capacity in the U.S. We're going from 130,000 SKUs. We've got around 160,000 today to around 270,000 SKUs within the next 2 years. They won't all be on the shelf by June of 2020, obviously, but we'll gradually bring them in. And we're using a data-driven approach and what customers actually buy as opposed to what suppliers tell us they think we can sell to go drive that stocking position within the Americas. Same approach we'll use in Germany.

We're initiating and announcing today a 2-year GBP 60 million project to expand our German distribution center. German distribution center is in Bad Hersfeld, is in the state of Hesse. It's about an hour from Frankfurt. Fantastic location, very low turnover. We've got around 170 employees that are in that facility today, great workforce, very process oriented. Not a lot of automation, but we will be bringing automation into that facility. It would be highly automated. It will allow us to double our capacity in Europe. So our capacity in Europe will go from around 0.5 million parts to just over 1 million stocked products, and that's pretty significant. That will give us the largest range of any industrial distributor in the European marketplace, which, oh, by the way, is our most profitable region around the world and represents 64% of our revenue. And you've seen where we are in terms of market share, in terms of number of customers. Not only is it great opportunity for Europe, Continental Europe, but also for the market in Germany, where we see huge potential. Manufacturing as a percentage of GDP is around 30%. So great opportunity within that marketplace. And we're actually seeing accelerated growth within Central Europe and Germany as we speak. And this will become a replenishment hub for EMEA. So we'll ship less product from the U.K. into Continental Europe. Now that then -- and I'll answer the question before it's asked, well, what's going to happen in the U.K.? Remember earlier, I said our market share in the U.K. is less than 5%. We believe we can double that. So over time, we'll bring more product into the U.K. as we get closer to the 10% market share level and double our sales within the Northern European marketplace. So great opportunity for us in the U.K. And regardless of what happens with that word, Brexit, we still have opportunity. We still see opportunity. This is still a great place to do business and we believe will still be a great place to do business regardless of the outcome. So we're committed to this marketplace. We continue to invest in the U.K. And we see greater days yet ahead as we continue to accelerate our performance and add value-added solutions to our portfolio within this marketplace.

Very focused now on supply chain on lean continuous improvement and, again, operating for less within our supply chain and optimizing our transport. We're still bringing too many products all around the world to different locations, taking product from China, bringing it to Europe, shipping it back to China. So there's opportunities to reduce cost from a freight perspective and just do things just in a smarter way.

So what are the benefits? Scalability. We've got to ensure we have the right capacity and the right place to support our 5-year growth plan. Now we've launched internally. In June 4, we've got a global leadership conference where we'll begin to cascade our 5-year plan across the globe. That plan is called Destination 2025. You'll hear more about that in November. But as we roll this plan across the company, it's an ambitious plan again to differentiate, disrupt and deliver sustained market share growth. Improved customer service. That's a huge benefit of having more automation, improving our throughput and increasing our product offering. New capabilities in areas such as electronics as well as value-added solutions. Increased automation. We actually last year in Nuneaton launched an auto-pack operation, which has saved us quite a bit of money and also improved the quality of the packaging. So we're looking to expand that to our expanded new distribution centers. Increased automation as well in terms of storage and retrieval, which improves the DC efficiency, which helps us operate for less. And again, savings in other areas such as freight as a byproduct of some of these initiatives. So again, our investment in the supply chain is a confident investment to be able to support growth and then drive -- and to drive improved returns.

Unrivaled choice. Unrivaled choice. We're building capabilities in the infrastructure to substantially scale the range of the products and solutions and services we have. We've got a great opportunity in areas such as safety products, in areas such as mechanical products that look and feel and have the same margin profiles, products we already sell that are easy to handle, that have limited liability. We see great opportunity in our private-label business as we go from 12% of our total sales in private label to a goal of 20% of our sales in private label without any degradation in our higher gross margins, great profit driver for the company, huge opportunity to expand our portfolio over time and other areas like safety products and mechanical products. So very, very excited. And as I mentioned earlier, this gives the group the scope to double our stocked range and significantly expand our nonstocked range. And how we do that is really, really important. And again, this is where execution comes into play. And this is where you got to have 1 eye focused on day-to-day, making sure we're buying the right products, making sure we're using the right information to determine what to stock and to make sure that not everything is going to be perfect. There are going to be products we bring in that we want to get rid of. So that's equally as important as how you bring product in. So if we bring product in we don't need, let's get rid of it fast and let's not bring it back in. So very important.

So what are the key benefits? Simply put, we can sell customers more product. It improves our data and content capabilities, which enhances the customer experience. Faster, automated product introduction. We've gone from around 90 days to introduce new products to 30 to 2 weeks to 1 week. We need to get that down to less than 24 hours. So really important for our suppliers and a real hot button for our suppliers and a more efficient management of inventory and risk. Over time, in the RS world, we need to reduce our provisions more to the level of Allied. So provisions are still a little bit high. A lot of it has to do with contracts with suppliers, but this allows us to manage risk more effectively. And ultimately, what's this all about? Why go expand the range? To get a higher percentage market share with our customers. And the best customer is an existing customer. We want to add more customers for sure, but we've got an opportunity again to substantially increase the amount of share wallet we have with our existing customers.

And last but not least, value-added solutions. And this helps us in what we call our stickiness factor with our customers. Switching costs go up substantially. When we have a value-added relationship, it makes our customers' lives easier. And we're enhancing our range across 4 key areas: design, procurement, inventory management and maintenance. Those are the 4 key areas we look at from a value-added standpoint within our business. And we're expanding these solutions across the globe. A lot of what we do, we test in the U.K. first, then we take out to other regions. It's working quite well today, so we're very happy with the solutions we have. So again, differentiate, disrupt, deliver.

Current trading and outlook. We believe we're well positioned to show good progress in this current financial year. We're off to an encouraging start. We've seen like-for-like revenue growth in the first 7 weeks, similar to the second half of the year. We've seen -- the trends in April were moderated a bit to low single-digit group -- growth that was impacted by holidays. May started though encouragingly a little bit better, again, with trends closer to Q4 in general. EMEA, 64% of revenues, continues to see strong market share gains, more than offsetting softness in the Americas. So we have seen some softness in the Americas. Some of that is related to single-board computing. We can't comment on what Raspberry Pi is doing, but there's anticipation in the market with the new model coming out, anytime there's a change in new model, we tend to see the older models drop off a bit in sales. There's only 2 partners, so you can look at what they announced, and you can see what we're saying. So take that out and less soft than with that in. And APAC is seeing similar trends as well as to Q4 in the second half. We're tightly managing our operating costs while we're investing to drive longer-term growth. And we remain as confident as ever in our ability to deliver another year of good progress overall.

In a nutshell, just to summarize, we are uniquely positioned in attractive market. One thing I worry about and people say, "What keeps you up at night?" It's complacency. We can never think we're that good, and there's always room for improvement. And we've got to avoid complacency because complacency kills. So we're uniquely positioned. We're only uniquely positioned if we take advantage of it in this market to continue to take market share.

Number two, driving market share gains. So we want to grow at twice the market. We're in a good position today. But again, this business is about today, not about 5 weeks from now. We've got to keep 1 eye on the daily performance. So digital quarter is the equivalent of the year in the analog world, so we've got to have a heightened sense of urgency and we can't lose that.

We've got to continue to focus on building a lean, simpler and more scalable model. So that goes across the board from technology to supply chain, to sales and marketing, to even the executive leadership and how we manage our time. So we're going to make sure we're very focused on making sure that we keep this, we live within our means, and we look at affordability, we look at what we can drive and we prioritize in the right regard.

And last but not least, we have generated strong cash, net debt-to-EBITDA down to 0.5, and attractive returns, return on capital employed. We want to keep it, obviously, at a higher level, but at the same time, we want to invest. We want to keep the right balance between ROCE and investment to be able to drive accelerated growth overall and targeting at a greater than 80% adjusted operating cash flow conversion.

So with that, we'll open it to Q&A. Thank you for being here today. And for those on the call, thank you for listening. So Kean?

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Questions and Answers

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [1]

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It's Kean Marden, Jefferies. Could I ask you first of all just to expand on Slide 20, if you wouldn't mind? Obviously, quite a lot of information in there, you've already touched, Lindsley, on some of the verticals. But, I mean, looking at the chart, the table, presumably, things like janitorial probably on the list of attractive areas to move into. So maybe if you can expand on that a little bit more and whether sort of competitors are sort of building up in those areas or pulling back a little bit. And I appreciate there's some mixed performance across the industry at the moment.

And then 2 quick ones. So you mentioned the cost of moving (inaudible) the business, just whether you can provide a bit of insight how much that cost Electrocomponents currently and maybe where you can move that to.

And then finally, just [buried in the snow], I spotted the British deal debt, which obviously has been in the press for some slightly unfortunate reasons recently. Just what actions have you taken to protect yourself about recovering the GBP 10.6 million that's outstanding?

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Lindsley Ruth, Electrocomponents plc - CEO & Director [2]

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Thank you, Kean. So let me take the first 2 and then David can talk on -- talk about British deal, I think. First of all, in terms of Slide 20, it's a European slide, it's not a global slide. There's even greater opportunity in Americas. In Europe, it's where we have -- we've got 570,000 stocked products roughly between Europe and the Americas. 80% of those are in Europe. So we already have a very broad portfolio in Europe. We've got a lot of room in the Americas and APAC to expand in some of these areas where Europe has a strength.

If we look at this particular slide, janitorial, (inaudible) actually is not a bad area, and you can see certain companies where there's bonds or other U.K. companies have done quite well in that area. So it's more about how you manage and handle hazardous materials. So these are products -- we actually have a category here we call big, heavy and nasty. They represent less than 11% of our sales. Bigger things like motors or things -- ladders, et cetera. Heavy could be a motor, it could be anything, and it weighs a lot. And nasty would be hazardous materials. And what all 3 have in common? You don't want to put them on a plane, right? So freight becomes quite expensive. It's not a bad business. So when you have the warehouse footprint we have, certainly, areas like hazardous materials, within reason, make a lot of sense. And again, this is about margin profile. Can we handle the product, et cetera? So I wouldn't rule that out per se.

I think even #1 area in terms of investment that was done in the survey recently by Industrial Distribution magazine in the U.S., safety products, by far, was #1 out of 27 different categories where everybody's looking to do more in safety. And what do you need from a safety perspective? Well, first of all, you're not going to try and get by on the cheap when you're buying safety products. Quality is important, right? And you don't want to buy a hardhat that will crack, and you don't want to buy gloves that will break or boots where the toe will split. And so quality is very important. So in general, customers are willing to pay a premium for the right quality. So we think there's a great opportunity in our own private-label business in that area.

Mechanical products. A lot of our customers buy mechanical products as well. The distribution companies are in that space, so there's some good opportunity there. So we really see opportunity across the board here in terms of all these categories, which is why they're on the slide. And so I think there's a great opportunity. It's a matter of how we select them and how we go about expanding that range in general over time.

So in terms of freight, we had -- in the RS world, there was a large percentage of product that came to the U.K. first. And the last 12 to 18 months, we've quietly been building up procurement capabilities across the globe and other countries, right? So it starts by having the ability to buy within that country before you can stock within that country. Otherwise, you're buying from the U.K. and having product shipped to the U.K., then shipped back to that country.

So in terms of percentages, Kean, we're going to the process now. It'd be more than 10% in terms of the opportunity of total freight costs. Could it be 20% or 30%? For sure. So we're looking at that on the inbound side. But it's not just inbound. It's outbound as well, right? So it's the overall optimization of our freight, making sure we have the right model in terms of where we put things. We invested in what we call control towers. This past year, we launched our track 1, which was track and trace. And we are focused right now on track 2, which is more from the supplier inbound to us to make sure we have complete visibility end-to-end, called the glass pipeline, if you will. So we have complete visibility from the supplier to the customer where product sits within that supply chain. So we're very focused in that area. So more to come that in the November time frame. When we come out, we'll touch on what we're doing around transport optimization in general.

As far as British deal...

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David John Egan, Electrocomponents plc - CFO & Director [3]

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Yes. British deal, the relationship sits with IESA. At the balance sheet date, we had GBP 16 million of receivable. Subsequently, they paid GBP 6 million. There is no overdue debt, so they have always paid on time. We have contracts with them, we're in dialogue with them. But obviously, the events of the last, I guess, few hours also is something that we're monitoring very, very closely. So we'll continue to work with them.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [4]

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It's Rory McKenzie from UBS. When you first arrived, you really halted CapEx plans as you focused on the basics. Now those plans are getting more sizable. Kind of 3 questions on the projects and the payback.

So firstly, in mixed markets, what are you achieving for revenue growth? And how sensitive is the payback to those assumptions?

Secondly, what do you assume from improved efficiency? You mentioned automation a lot. So how much can that really help?

And then thirdly, in addition to the CapEx, should we expect lots of upfront inventory investments to go in, support this expansion in the range as well? And how is that factored in?

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Lindsley Ruth, Electrocomponents plc - CEO & Director [5]

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Sure. So I'll let David comment on revenue growth and efficiency. I'll just make some broader statements. Let's not forget, we've talked about a 45%, 30%, 15% model for the last couple of years. So 45% gross margin, this is organically in our core business, 30% cost of sales, 15% operating profit. If we look at the 30%, you say, "Well, where are you today?" 33% roughly. That implies 3%. So there's more to go, right?

Shared services is a big part of that. David touched on Foshan. We've got shared services now in Corby for Europe and shared services in Fort Worth we're building out for the Americas market today. So great opportunity for more centralization for the use of automation, for RPAs, et cetera, over time. And just doing things that a bit smarter in the areas like the supply chain, IT, technology.

So we've got a lot of room for improvement over the next couple of years. And what we call PIP Phase II, which code name was Kodak, and that was to avoid becoming irrelevant as a company, that was all about driving a simpler, more scalable supply chain, with the byproduct of that being some efficiency gains. And we said we'll come back in the future around supply chain, technology and shared services. So we're working on that. There'll be more on that in November in terms of what we think is possible in that front, Rory.

I think from an investment -- capital investment, the inventory will be staggered as we come in, as we bring product in. We haven't changed our philosophy in terms of inventory turns, that we think this model runs at the low side of 2.5, the upper side of 3. So what we want to do is make sure that we have the right approach from a data perspective in terms of how we stock. So those could be rules such as we're not going to make a product for stocking item to at least have 5 different customers to buy the product, and there's lots of factors that go into that. That's why we want to have a really strong nonstocked range, that we have a lead time associated with that. But we've got to have world-class systems in terms of lead time management.

So over time, we'll bring that inventory in. You're not going to see us wave a wand, open up Germany, cut the ribbon and bring in 0.5 million parts to that warehouse. So we'll stagger it, we'll bring it in slowly. And oh, by the way, we're not waiting. So we're finding areas to put the inventory in now. So we'll be increasing our inventory, and we have over time. We've been adding around 60,000 parts to the year the last couple of years. The numbers have gone up overall because we've been taking parts out, too. So you're always pruning a little bit as you're adding. So we were actually -- we're working on where do those products go. Huge focus internally today is on product and supplier management and what we can do better. We have a global supplier conference coming up June 6 here in London at the luxurious Sofitel at Terminal 5, the basement, which makes it convenient for suppliers to get to. But we've got a conference coming up, and we talk a lot about customer experience. And customer experience isn't just about external customers. This is about our suppliers as well and becoming first choice for them. We have very specific revenue growth targets related, obviously, to the capital investment. So I'll let David comment.

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David John Egan, Electrocomponents plc - CFO & Director [6]

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Sure. The primary objective of both the warehouses has been about expanding out the range of our product, and so at least doubling the range within both the Americas and also within European context, as Lindsley said. That -- our stated objective from a revenue perspective is through cycle 5% to 8%. And these -- both of these investments will help us on that trajectory. I wouldn't go -- I wouldn't say at this stage sort of what are our internal targets in terms of revenue growth, but it's certainly to support that aspiration through cycle 5% to 8% growth.

Efficiencies. There is efficiencies built in to both of these facilities. It's not a material amount in terms of absolute financial return, but it's certainly an internal object to put as much efficiency into the 2 warehouses as possible.

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Unidentified Analyst, [7]

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(inaudible) from HSBC. Two questions. Given the recent developments with Huawei, do you see any impact from this either in terms of having to remove specific SKUs or demand in alternative SKUs? And secondly, on the shift towards a higher pace of inventory turn, do you see any of that from digital investments? And are these product lines either accretive or dilutive to the gross margin?

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Lindsley Ruth, Electrocomponents plc - CEO & Director [8]

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So first of all, I'd say the goal is obviously to be accretive to gross margin, certainly with private label. If not, then from a gross margin percentage standpoint, they'll be on par with our gross margins. So as I said earlier, we want to have products that have a similar look and feel to what we do today from a gross margin, from a product handling perspective, which is really important.

From a Huawei perspective, we have -- it has no impact to our business. From a U.S.-China trade war perspective, there's less than 8% of our products in the Americas that are impacted by tariffs or duties. It's even less than that in terms of the products that actually have a tariff or duty applied to it because we're able to shift the sourcing of those products to the same manufacturing in Mexico or other locations around the world. So at the same time, anything that we do have or see, a tariff or duty, whether it's 10% or 25% that's passed along to customers. And so there's been a limited impact to us outside of just the disruption in the supply chain in general, which has a bullet effect throughout the supply chain, right? So we don't get into political commentary at all.

And I think from a Huawei perspective, 5G around the world will help accelerate IoT. And we're focused on the industrial Internet of Things and connectivity. So I think over time, as 5Gs roll out, you'll see a greater adoption in terms of factories, automation, more preventative maintenance, and we'll certainly be at the forefront of that. But for us, there is no influence impact to our business outside of maybe some salespeople. In China, they have Huawei phones. They won't be able to access the Android system moving forward. But that's the extent of my technical knowledge on that.

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Julian Charles Cater, Numis Securities Limited, Research Division - Analyst [9]

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It's Julian Cater from Numis. I've got 2 questions, please. On Slide 18, you've talked about driving market share. There's clearly a pretty positive trend in both customer numbers and AOV. And I wonder whether you could possibly help us when I think about how average order frequency might have trended over that period if we were to overlay that on that graph.

And my second question is in relation to the Americas business. Lindsley, I think you've expressed a couple times a bit of frustration with the pace of growth within that region. And in the course of the presentation today, you've talked about the need to double the size of the warehouse. You've also talked about additional pricing discipline. And I wonder whether the sort of interrelationship of those 2 factors, the salesmen have got less flexibility on discounting and you just don't have the product that customers require has impacted the growth there or whether there are other factors you can help us with.

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Lindsley Ruth, Electrocomponents plc - CEO & Director [10]

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Sure. Look, in terms of -- we'll take your questions in order. In terms of average order frequency, our average order frequency for Europe is up 2.4% year-over-year. Number of customers is up 5.9% for Europe year-over-year. As far as the Asia market, it's up slightly higher. It really depends on the markets. It's not up as high as the average order value, which is up, I think, 4.6% for the group, excluding -- well, excluding IESA, it's up 4.6%. Including IESA, it's up 6.1%. So the average order frequency, yes, that's a measure of how frequently customers buy from us. I think we'd rather have customers buy more at once than buy 3x during the week. So I think it's less important than the average order value, but it's an important metric without a doubt. That's important overall.

The second question, the Americas. I would be careful what I say because they might be listening in the Americas. Look, being an American, although I haven't lived there in 14 years, it is -- my expectations are much greater. And I think you've got a very interesting market in the Americas today. Now April had some impact by Easter because Easter the prior year was in March. I think more people took holiday this year. If you have kids that are in high school or younger, spring break in the Americas tends to fall on Easter. So I think there are more people that took some vacation because the economy is doing well, consumer spending is up, et cetera. Economy grew 3.2%, but in the month of April, manufacturing durables was down 0.5%. So you've got kind of a tail of 2 economies right now, the manufacturing -- look at automotive, that's down. Oil and gas is up a bit. As the prices go up, I don't know what is per barrel, $72, et cetera. So there's a lot of the macro factors, I think, that are creating some confusion as to what's happening in the Americas.

Wipe all that up because to me, it doesn't matter. What matters is the size of the market opportunity. And it's not the range, and it's not discounting. We actually improved our margin a bit. I think it's all about having the right plan and executing. And if you narrow your strategy, we've got a great focus on automation controls. We're growing double digits in automation controls, but we still have half our businesses outside of automation controls that's lost, I think, a little bit of focus.

So for me, Julian, my plan is to spend from August to January as much time as I can in the Americas from a strategic perspective, shaping the culture, shaping what we're doing and getting us to the right place to where we could be a lot more aggressive in that market. It's not from a pricing standpoint, but getting more productivity from our resources, looking at where we can upgrade the talent. I'm challenging our team, make sure we have the right focus on key objectives and results, because I think anything short of the numbers that we have in our head over the next 10 years is unacceptable, and that's substantially accelerated over where we are today.

And so rest assured, this is -- I don't like predicting the future, and we don't give guidance, but I'll give you this guidance, we're going to do a hell lot better in the Americas moving forward. You can count on that.

Any last questions?

Quick time for a spoiler alert on Game of Thrones for -- no. Thank you very much for everyone listening on the call today, and we thank you. For those people who are in the room, we'll be around for another 15 minutes or so. We've got an internal call, but we thank you for your support.

We're as confident as ever in the business today. And most importantly, for those listening on the call, I'd like to thank the hard-working men and women that are in this room that are on the call of Electrocomponents worldwide. These results wouldn't happen without those people. Our #1 priority is the health and well-being of our employees. We are a for-profit company, but charity starts at home. And we want to make sure our employees are taken care of. And happy employees produce greater results.

So thank you to those listening to the call, and thank you for everyone for being here today. Thank you.