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Edited Transcript of ECM.L earnings conference call or presentation 20-Nov-18 9:00am GMT

Half Year 2019 Electrocomponents PLC Earnings Presentation

Oxford Nov 20, 2018 (Thomson StreetEvents) -- Edited Transcript of Electrocomponents PLC earnings conference call or presentation Tuesday, November 20, 2018 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David John Egan

Electrocomponents plc - Group Finance Director & Director

* Lindsley Ruth

Electrocomponents plc - CEO & Director

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Conference Call Participants

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* Daniel James Hobden

Crédit Suisse AG, Research Division - Research Analyst

* Henry Carver

Peel Hunt LLP, Research Division - Analyst

* Jane Linsdey Sparrow

Barclays Bank PLC, Research Division - Director

* Rajesh Kumar

HSBC, Research Division - Analyst

* Rory Edward McKenzie

UBS Investment Bank, Research Division - European Support Services Analyst

* Sanjay Kumar Vidyarthi

Liberum Capital Limited, Research Division - Research Analyst

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Presentation

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

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Good morning, everyone. And I'm Lindsley Ruth, CEO; joined today by David Egan, our Group Financial Director and CFO, to discuss our 2019 first half financial results.

So in the first half, we've seen above-market sustainable growth and strong execution. In the first half, we saw 9.8% like-for-like revenue growth continue to drive share gains. So we definitely think that around 1/2 to 2/3 of the growth for the first half were gains in market share in what we know is a very large fragmented market.

Adjusted operating profit rose 150 basis points or 1.5 percentage points from 9.9% 1 year ago in the first half to 11.4% operating profit in the first half, aided by higher gross margin and tighter cost controls. We've seen strong growth in profit before tax, earnings and free cash flow. In the appendix of the presentation today, you'll see the last 8 first half results of our earnings. You can see a nice trajectory there. From an EPS standpoint, we're up 30.5% like-for-like year-over-year.

Further improvement in customer experience. As we've said before, this business is all about customer experience. And the Net Promoter Score, which is one of the key aspects to our pay plans, has improved 3.8% for the group in the first half.

The -- our first acquisition in 19 years, IESA, is performing quite well with like-for-like revenue growth of 30% and some encouraging new contract wins. There's a lot of discouraging news out in the market today, but we're very encouraged by the wins that we've picked up recently.

Good progress on our second phase of our Performance Improvement Plan, which David will talk about, to drive simplicity and scalability in our business and to continue to drive growth and superior returns.

Our agenda for this morning. David is going to go through and review our financial results, give you an update on our Performance Improvement Plan Phase II. And remember, the first phase of our Performance Improvement Plan was focused around 3 key factors. One was putting the customer back in the heart of everything we do. Two was driving accountability back into our business, putting P&Ls back in place around the world. And three was operating for less, through which we delivered GBP 30 million of cost savings. And we've moved on to the second phase of our Performance Improvement Plan. It is part of our overall transformation plan for the business. I'll then come up and review our performance around becoming first choice and share some statistics with you. I'll go through regional performance and talk about the progress that we're making within Asia Pac and some of the other regions around the world; the acceleration of our own branded private-label product, RS Pro; and then a quick discussion around IESA value-added services and our outlook for that business and the current trading and overall outlook.

At this point, I'll turn it over to David.

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David John Egan, Electrocomponents plc - Group Finance Director & 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, cash flow and earnings per share for the first half of our year to September 2018. These results also include a strong first 4-month contribution from our IESA acquisition, which was completed on the 31st of May. IESA contributed GBP 11 million of revenue and GBP 2.8 million of adjusted operating profit in the half and is excluded from all like-for-like comparisons.

Group like-for-like revenue growth was 9.8%. Digital revenue, which accounts for 61% of revenue, grew at 9.7%. RS Pro, which accounts for 12% of revenue, saw growth accelerate to 12.2%, an outperformance versus the growth -- the group growth rate.

Gross margin improved 70 basis points on a like-for-like basis to 44% -- 44.4%. Strong revenue growth, higher gross margin and continued cost discipline drove a 25.9% like-for-like increase in adjusted operating profit to GBP 104 million and a 140 basis point like-for-like improvement in adjusted operating profit margin to 11.4%.

Adjusted EPS rose 30.5% on a like-for-like basis to 17.2p. Return on capital employed has increased to 26.4% in the first half versus 25.2% in the first half of 2018.

And finally, we will pay an interim dividend of 5.3p per share. This is in line with the guidance that was given at the full year, that our interim dividend would represent 40% of the prior year full year dividend. We are committed to pursuing a progressive dividend policy whilst further increasing dividend cover over time by driving improved results and stronger cash flow.

Now I'd like to update you on progress we're making to drive operational excellence and best-in-class margins. Group gross margin was up 100 basis points to 44.4%. 30 basis points of this improvement was driven by accretion from the acquisition of IESA, which has a significantly higher gross margin than our base business. The balance of 70 basis points of improvement was like-for-like and was driven by a number of actions across the business. These included improving product mix, with strong growth in higher-margin products, particularly RS Pro; and activities to increase discount discipline across the business, with Allied in particular making strong progress on this front.

Going forward, we continue to focus on a number of initiatives associated with gross margin including, but not limited to, accelerating new product introduction at RS Pro. We're on track to launch over 10,000 new products during FY '19, which is almost double what we launched in the prior year. We see a significant opportunity to expand the RS Pro product range, and as such, we plan to keep up this higher level of new product introductions over the next few years.

We're also rolling out new pricing tool, which will transform our pricing operations, enabling us to be more nimble and opportunistic on price. The tool is on track to be rolled out through the EMEA region through the balance of this year and, following that, to our Asia region.

We're also looking at ways that we can improve our purchasing. Today, our focus is on strategic supplier engagement to drive improved terms by consolidating more of our purchasing with key suppliers. Tomorrow, we'll be looking at global sourcing initiatives to ensure that we source where it makes the most strategic sense.

The second key area of focus is to drive a higher operating profit margin. During the year, adjusted operating profit margin rose 150 basis points to 11.4%. The IESA acquisition enhanced operating profit margin by 10 basis points, and the balance of the increase was like-for-like. This improvement was driven by 3 key factors: strong revenue growth; higher gross margin; and an increase in our adjusted operating profit conversion ratio, which rose 300 basis points to 25.7%. As you can see from the chart, we drove this improvement by tightly managing underlying costs despite seeing the annualization of the investments that we made during the second half of 2018 in areas such as talent, innovation and digital. Overall, total adjusted operating costs were up 7.8% like-for-like, some way below revenue growth of 9.8%. And as a result, our adjusted operating costs as a percentage of revenue fell by 50 basis points to 33%.

Looking forward, we remain highly focused on driving efficiencies so we can continue to convert a higher proportion of our gross profit into operating profit. We aspire to achieve a best-in-class operating profit conversion ratio of closer to 30% and a mid-teen operating profit margin. Our Performance Improvement Plan number 2, which I will come on to talk to about later, will be key in helping us to realize this opportunity.

Looking at the summary income statement. Adjusted operating profit before tax was GBP 100.2 million, up 24.9% on a like-for-like basis. Excluded from adjusted profit are charges of GBP 7.2 million, which relate to GBP 5.4 million of labor-related substantial reorganization costs linked to the second phase of the Performance Improvement Plan and GBP 1.8 million of amortization of intangible assets arising from the IESA acquisition. The adjusted tax rate was 24%, down on last year's rate of 28%, and this was due primarily to lower U.S. tax rates.

Looking at the cash flow. First half adjusted free cash flow increased to GBP 34 million from GBP 17.4 million in the first half of last year. Strong growth in operating profit more than offset continued inventory investments to support our revenue growth. Working capital as a percentage of sales rose 150 basis points to 22.7%. The like-for-like increase was 30 basis points, with the balance relating to the IESA acquisition.

Stock turn remained stable first-half-on-first-half at 2.7x but was down slightly on our year-end level of 2.9x. CapEx increased to 0.9x depreciation from 0.7x in the first half of last year as we began a GBP 40 million 2-year project to more than double the size of our Allied warehouse in the Americas. Given we only initiated this project towards the end of the first half, we would expect a higher weighting of capital expenditure to the second half of the current financial year and continue to expect capital investment to depreciation to run at around 1.7x for the full year.

Net debt at the end of the first half increased to GBP 139 million. We continue to have an extremely strong balance sheet with net debt to adjusted EBITDA of 0.6x.

During the second half of the year, we are planning to invest around GBP 30 million in additional contingency inventory across our network in the U.K. and Europe. This investment will focus on product lines designed to help us to continue to offer our customers the high service they expect from RS in the event of any disruption around the U.K.'s exit from the European Union. We expect this to be a short-term investment in inventory, the exact scale of which we can review as the situation around the borders becomes clearer. Over time, we would expect to see inventory levels return to more normalized levels.

And then finally, on guidance, I've included a slide in the appendix of your pack with some key guidance points which you may find useful.

Now moving to Performance Improvement Plan Phase II. As we said in May, PIP II is all about equipping ourselves with the right tools so we can change the game, laying the foundations for future growth. This plan is based around 3 key principles: simplicity. We're making our organization structure simpler so accountabilities are clear and decision-making quicker. Second, customer centricity. We are moving more activities and decision-makings into the regions and closer to the end customer and supplier. And then finally, on scalability, we're building a scalable platform capable of supporting our growth plans and investing in shared services and automation so that we can drive improved service for our customers at lower cost.

So during the first half, we've introduced a new simple regional structure based around 3 key regions: EMEA, the Americas and Asia Pacific, with regional presidents reporting directly into Lindsley. Under this new structure, more activities, such as marketing, digital, supplier and product management, had moved into the regions. The benefits of this new structure include increased accountability, faster decision-making and greater focus on the customer. We will operate with a lean corporate center focused on group finance, group HR, legal and corporate development; and global commercial services to support the regions, such as technology, sourcing, pricing, supply chain, RS Pro and electronics. As a by-product of this new structure, we are generating efficiencies. We are on track to deliver GBP 4 million of savings in the current financial year and GBP 12 million by March 2021.

For scalability, we have a regional focus, and being close to the end customer is important. However, we also need to equip ourselves with the right tools and capabilities to be able to scale this business. As such, we've been setting up a global shared service footprint and are increasing investment in automation.

Firstly, on shared services. In early October, we opened a new center of expertise in Asia in Foshan, Southern China. This initially housed around 100 people focused on finance, customer service and inventory management. During the second half, we will be expanding this team further to support our operations in Australia and New Zealand. We're also establishing a regional center of excellence for both EMEA and the Americas. Today, our center of excellence for EMEA, based in Corby, is focused on finance and customer service, but we will look to expand its reach further over time.

Moving to automation. We're also commencing the rollout of a global program focused on automating standardized transactional activities, allowing us to drive improved service at lower cost. Over the last 12 months, we have been running automation pilots across the business in areas such as customer service and finance. During the first half, we identified a preferred third-party partner and are on track to deliver our first automation solution this financial year. We're now in the process of identifying activity across our business which could in time be automated. Over time, we plan to scale the use of automation across the business.

And finally, we continue to optimize and invest in our supply chain.

All these activities are focused on driving improved service at lower cost and building a truly scalable model, allowing us to move forward at a faster pace.

And on that, I'll hand you now back to Lindsley.

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

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Thank you very much, David. There's a lot of uncertainty out in the world today, and I can tell you one thing that is certain. And that is our mission remains unchanged, and that is to be the first choice for our customers, suppliers and employees. And the second phase of our Performance Improvement Plan is playing a key part on us setting up the company with the right capabilities to do so.

Our regional structure ensures everyone in the business fully understands and buys into where we're heading as a business. It's helping us build a culture where people are ambitious and accountable and know the pivotal role they need to play. We brought functions like marketing and product closer to the customer and the supplier. And as a result, we're developing a more relevant local proposition for our customers.

We're also working better and closer with our suppliers to provide customers more and more value and to make more possible. We're making great progress, I know we can get this right, and this will enable us to continue to drive sustainable growth and superior financial returns for our shareholders over the long term.

So whichever way you look at it, our marketplace is large. Let us focus on our market opportunity for a minute. We said to you many times before that our market is large. Our estimate of the market opportunity is somewhere around GBP 400 billion. However, we serve many different sectors, offer a vast array of different product categories, so our market is notoriously difficult to define and indeed quantify. As you can see on this slide, there are numerous definitions of our market out there. But whichever you choose, it's clear that the opportunity is huge. And while we're one of the largest global players in this market today, we're barely scratching the surface of the opportunity.

This market is highly fragmented. Outside of the electronic specialists, we do not have any truly global competition. Our key competition are local or regional industrial distributors or vertical-category specialists, which do not have the scale nor do they have the resource to set themselves up to succeed today in a digital or mobile world.

So with it, there's a significant opportunity to take share. As such, we're well positioned to take share in this market. Our legacy and catalog distribution means we have the product availability, the technical expertise and the supplier relationships to take share. But we're unique at also having the scale and digital expertise. We need to drive share and disrupt traditional players.

And the opportunity, of course, is vast. Today, our largest customer count is in the U.K., which incidentally continues to show one of the fastest growth rates. However, when one looks at manufacturing GDP across the world, it's clear that the size of the opportunity in some of the other markets we operate in is a multiple of that of the U.K. So while today, we have over 2x as many customers in the U.K. as we have in the Americas, the U.S. market opportunity is over 9x that of the U.K. Similarly today, we have over 8x more customers in the U.K. than in China, but the Chinese manufacturing GDP is around 16x that of the U.K. We need to build efficient, customer-facing regional capabilities with the right talent and resources to drive scale in these larger markets. And this is what we're trying to do. This is what we're doing.

So we're focused on driving share in a fragmented market. We've got a significant opportunity, first, to sell more to our existing customer base. And our average order values are improving quarter-over-quarter. All of our customers can buy more from us. Most of our larger customers are trying to consolidate their supplier bases. And we can and we will sell more into our existing industrial customer base by expanding our range and offering new solutions and value-added services to make our customers' lives easier.

Second, we will expand and grow our customer count. This will be primarily done by our digital channel, so digitally driven. We have built industry-leading digital capabilities. This year, we won over 4 major awards for the leading work we're doing in brand awareness and digital marketing included in our For The Inspired brand campaign. And we're using this to grow our customer base.

Finally, we'll look to use M&A where necessary to accelerate this strategy. Whether this be strengthening our range in new product areas, adding scale and customers in existing geographic regions where we're underrepresented or growing our value-added service offering.

So let's look at our regional performance. First of all, we've made another step forward on our customer supplier experience. Let's comment on how we're performing and capitalizing on this opportunity.

First and most importantly, we're putting our customers and suppliers at the heart of our business. As David said, our new structure has moved decision-making closer to the customer and supplier. No longer are we in an ivory tower in Oxford. Every board meeting we'd start with a review of the customer. This is key. We need to put the customer front and center of everything we do. We're leading the way in digital and continue to drive improvements. We cannot become complacent. We're scaling personalization across our websites using customer data to make each customer's online journey more personal and relevant to them. Not only is this making the experience richer for our customers, but it's also boosting our conversion rates. We continue to drive our mobile-first strategy. We're using new technology to build an industry-leading mobile experience. In fact, last month, we crossed 1 million online visits from our mobile site for the first time ever. Mobile has the scope to reempower the engineer to be the product specifier as opposed to the procurement department.

However, we also need to continue to make sure we're a reliable partner for our customers and suppliers, always delivering the best-in-class service they expect. And we continue to drive improvements across the business. During the first half, we made significant progress in areas such as customer returns and back orders, which impact our on time to promise. We've also sped up the new product introduction process. Speed of NPI was a common complaint when I first arrived. And over the last 18 months, we've reduced the amount of time it takes to introduce a new product from 162 days to just 27 days, which, by the way, is still not good enough. We need to get it to 5 days and eventually to 24 hours. We're still not satisfied. We're looking to drive further improvement from here.

All these activities and many more are driving higher customer satisfaction scores, which we refer to as NPS, Net Promoter Score, across all 3 of our regions. And it's good to see RS Components in the U.K. now achieving a 5-star rating on Trustpilot, which is way above what our competitors score.

So moving to the regions. I'm really pleased by how we performed in the first half. We have seen strong growth, executed well and we believe taken market share in all 3 regions. Undoubtedly, the star performer has been EMEA, which has had the least help from underlying market growth and seen the largest outperformance and market share gains. And of course, don't forget, it represents more than 60% of the sales of the group. It tends to be EMEA and particularly the U.K. where we pilot and launch activities. As such, initiatives such as value-added services, sales force effectiveness training and personalization are most advanced in this region. We will roll these out more aggressively in time to other regions to drive further outperformance versus the market.

If we look at the group as a whole, you can see that our growth has been driven by steadily increasing our customer numbers. We did see a big uptick here when we first stepped up our digital marketing efforts. We need to keep this moving. But the area we have made the most progress in, in the first half of the year has been selling more to our existing customer base. And we have a lot more scope to increase this, which we can talk about later.

In regards to EMEA performance, we've seen a 9.3% like-for-like revenue growth the first half. We estimate 1/3 of this is from the market itself and 2/3 of this growth from market share gains. We're selling more to existing customers by improving our customer service, and EMEA NPS was up 4.3 percentage points. We're introducing new products and rolling out new value-added services. Within EMEA, it represents the largest percentage share of our private-label brand in the world. And we've seen an accelerated growth, and so I'll come back and touch on that in a moment, within EMEA as well as globally.

So we've introduced new products, and we're rolling out new value-added services. We've improved our e-procurement tools, and we're actively now beginning to market IESA services, IESA being the acquisition we made in May, to our customers in the U.K., France and Germany. We're also driving more customers to our sites. We've done some great work at building brand awareness in the U.K., and we now need to do more across the rest of EMEA.

Dave and I have just returned from the electronica trade show in Germany, where the RS presence was very, very impressive. electronica trade show happens every other year and is the largest electronic component trade show in the world. Consumer Electronics Show is slightly larger, but that's mostly for finished products. Our Titan II truck was there during the show. We had over 600 customer meeting requests, over 80 supplier meetings and gained over 5,000 new social media followers. This is a key way of us adding new electronic customers in EMEA.

We remain focused on driving gross margin in EMEA. Gross margin improvement and tight cost control led to a 16.6% operating profit in the first half -- I'm sorry, 16.6% operating profit growth in the first half and an operating profit margin of 15.5, 15.5%, which was up 90 basis points on a like-for-like basis from 1 year ago.

Turning now to the Americas. The Americas saw a 10.9% revenue growth. We believe approximately half of this growth was driven via market share gain with the balance coming from market growth. Growth slowed in Q2 to 9.1% versus 12.6% in Q1, primarily due to tougher trading comps. Tariffs, however, are leading to some uncertainty, and we heard this at electronica from many suppliers and recently at what we call Allied Expo in the United States. And as we said back in October on our call, our direct exposure to tariffs is limited. So for us, the tariff products represent less than 7% of revenues. But indirectly, the tariffs are having an impact on the overall supply chain in the Americas by reducing the availability of some components and leading to increased delays in administration. So some concerns over the tariff situation, certainly not only within the U.S. but also within China. And I'm sure we'll have some questions on that later.

We continue to drive share in the Americas by selling more to existing customers by improving our customer service. Allied has the highest regional NPS score in the world for us. It's 68.8, and we still manage to continue to drive this forward by improving it by 2.7%. We've expanded and we are expanding our product range within the U.S. to sell more to our customer base. We added 19,500 stocked products in the first half. Our warehouse expansion project, as David alluded to, is now underway and it offers scope to more than double Allied's 150,000 stocked products over time. We're also introducing more new RS Pro products in the U.S. market. As David referenced earlier, our goal for this year is to introduce 10,000 new RS Pro products. In the first half, we introduced 5,400, which was more than what we introduced in all of last year.

Finally, we're focused on improving gross margin in the Americas and improving our mix by selling more RS Pro and own branded products and higher-margin MRO products to our existing customers and driving increased discount discipline. All this has driven a further step forward in gross margin in the first half of the year.

Higher gross margin alongside tight cost control has driven a 25.6% like-for-like increase in operating profit in the region and a further improvement in operating profit margin to 13.1%. Nice to be in the teens.

Finally, turning to Asia Pacific. We saw a 9.6% like-for-like revenue growth in Asia Pacific. While we believe we are taking share in Australia, New Zealand and Southeast Asia, we have further work to do in China and Japan. We've made a great deal of progress in the region over the last couple of years. Remember, 2 years ago, we lost GBP 22.7 million; last year, GBP 3.7 million; and the first half of this year, we actually made a profit. And we were asked 2 years ago how long we thought we would take for us to turn a profit in the region. Many of you remember that. We're pleased to say it didn't take the 23 years that we've been there to turn it around. So we're making progress in the region, but we still have a ways to go.

So with that, while we're pleased by the progress in delivering GBP 0.7 million of profit in the first half, we continue to aspire to drive double-digit operating profit margin in this region. And in order to do this, we need to pick up the pace of growth and drive scale. In China, it's all about scale. So with regard to scalability, our new shared service center will help us with that. So as such, we're now trying to build our capabilities to enable us to succeed in this region in the longer term.

As I mentioned, the new shared service center David referenced earlier in Foshan, which recently opened, is an important component of this and will give us the ability to deliver improved service at a lower total cost.

As we move into the second half, we're also going to increase our investment in talent in the region to strengthen our capabilities in areas such as digital and product, enabling us to drive improvements in our local offer. We've got to get the right leadership right within this region. This investment means we could take one step backward in order to drive the business forward faster in the medium term. But as you saw earlier, if we can get key markets such as China and Japan right, the opportunity is immense.

Now moving on to RS Pro, our own private-label branded product. We saw RS Pro like-for-like revenue growth accelerate to 12.2%. Back from 2011 to 2015, our private-label business was in decline. Since April 2015, we've actually grown it every single month. So very pleased with the performance and the acceleration to 12.2% in the first half, which was an outperformance versus the group growth rate, as you remember, of 9.8%. So this acceleration has continued into the first weeks of -- the first 6 weeks of the second half, which is encouraging. Never forget what gets measured gets done. Our private-label business is a key component of our pay plan for all managers around the world this year. So it's nice to see the encouraging results. This year, we've also made RS Pro a key part of our bonus plan, as I just said.

So we continue to aspire for RS Pro to become a larger percentage of the group. In our strongest market, the U.K., RS Pro is well over 20% of the market's revenue. And in France, it's over 15%. So that shows you what's possible within a region and what we can achieve. As well as continuing to grow RS Pro in these key markets, we need to drive faster growth in markets such as Italy, Germany, the U.S. and China, where RS Pro is less established. And this is our focus. In some of the larger markets such as China, we're looking at new local partners and resellers to take the RS Pro brand forward at a faster pace. We signed more than 20 resellers in the first half of this fiscal year within the Chinese market.

We're using our data and our global sourcing capability to identify new product opportunities in areas such as automation and control in interconnect, passive and electromechanical products. And as I said, we're on track to launch more than 10,000 new products. We launched 5,400 in the first half. In 2019, we plan to ramp this up further as we move beyond 2019 into 2020 and beyond. We believe today, we'll have at this -- the end of this fiscal year around 60,000 private-label products. Longer term, we'd like to have more than 200,000.

Now finally, moving on to IESA. We're very pleased with IESA's performance over the first 4 months in the group and excited about the opportunity to grow this business by leveraging it across our global infrastructure. The IESA acquisition integration has gone very well, which is great to see given we haven't done one in 19 years, our first acquisition in a long time. So great credit to our corporate development and integration team for all of their hard work on this.

IESA delivered over 30% like-for-like growth in the first 4 months, delivering an adjusted operating profit of GBP 2.8 million on revenue of GBP 11 million. It is accretive to both group gross margin and adjusted operating profit margin. Client and supplier feedback to our acquisition has been very encouraging. We've not lost a single IESA client or supplier. In fact, many of IESA's blue-chip clients have been encouraged to see IESA, who they see as a key partner, being part of a larger group with a stronger balance sheet. New business pipeline at IESA since acquisition continues to be encouraging, and we're confident it will more than cover our cost of capital during its first full year within the group.

But what is perhaps more exciting about IESA is the future potential. The IESA model is compelling. It's all about delivering a lower total cost of ownership for clients, and it gives us a way to drive growth with larger customer accounts profitably. This chart shows their client base. And as you can see, it's blue-chip and includes a number of companies with global operations. We're beginning to support some of these clients in their overseas operations. So while today, IESA is predominantly a U.K. operation, we believe and do see scope this -- for this to become more international over time. And it's already picking up contracts in other key RS markets such as Germany and France.

IESA has 80 clients today. The rest of the group has over 1 million and a much larger sales force. We're working to educate our global sales force on the IESA model and value proposition and looking at incentive structures to ensure we introduce new clients to IESA.

Finally, RS and RS Pro are already major suppliers to IESA and, as such, will benefit from its success and over time have scope to sell significantly more through IESA. We're extremely excited by the potential.

Moving on to current trading. We've had a good start to the second half. We had 7% like-for-like growth in the first 7 weeks of the half. In terms of color by region, EMEA is seeing the strongest growth predominantly driven by share gains, Americas is growing close to the group average, and Asia Pac has seen slower growth in the first 7 weeks but is still in positive territory.

It's hard to stand up today and not to mention Brexit or the external environment. Following the referendum result, the group created a committee chaired by David Egan to assess and mitigate the key business risks associated with Brexit. We have begun implementing initiatives to ensure we are prepared as best we can for more uncertain markets and possibly a hard Brexit. We will be even more proactive at managing costs while continuing to invest in areas that are key to drive share, such as customer service, digital and sales. We've been planning for Brexit for quite some time, as many of you know. So the announcement we made today on the incremental investment in inventory of GBP 30 million has been planned for quite some time, and was just -- now is the time to push the button.

So we're on track to deliver, as David referenced, in our Performance Improvement Plan Phase II, GBP 4 million in savings this financial year and GBP 12 million by March of 2021. We will focus on driving cash flow and maintaining a healthy balance sheet. I'll repeat that: we will focus on driving cash flow and maintaining a healthy balance sheet. Our business has good momentum, we're well positioned, and as a result, we're confident of continuing to make strong progress in the full year.

In summary, we're extremely well positioned in a large, fragmented and growing market. We have significantly strengthened the talent and leadership within this organization and our ability, a simple, scalable model, so we're well-placed to exploit it. We will continue to drive share gains in our market via a relentless focus on the customer, working closely with suppliers to make more possible, being a standout leader in digital and the expansion of our range and value-added service offering. We will be opportunistic and look to use value-accretive acquisitions to accelerate our strategy. However, organic growth is priority #1. We remain excited by the significant opportunity for continued growth and improvement and confident that we are well positioned to continue to drive sustainable growth and superior returns for shareholders.

With that, I'll open it up for Q&A.

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Questions and Answers

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

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Rory?

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [2]

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It's Rory McKenzie from UBS. I guess to start with the uncertainties you referenced weighing on growth. Can you talk more about North American market and how the indirect tariff impact is weighing on the market, and in particular, when you think you'll really start to see that hit and if you're preparing for things to get any worse? And maybe that one first.

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

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Yes. So come back here to the microphone. So I mean, in terms of the impact, it started happening in the last couple of months. And when we were at Allied in the early part of last month, the end of September, we talked to numerous suppliers, and they were feeling it. They were seeing the impact of the tariffs, not only on their business, in fact, indirectly, as we referenced in our statement, throughout the Americas. Business investment, as published by the government recently, is at -- last quarter was at a low over the last 3 years. And so we're starting to see the impact of the concerns and the uncertainty on that market. And also, the potential emotional backlash against U.S. companies in China that do business in China. So there's a lot of stories out there, and they're uncertain times. And however, with that, Rory, that's certainly not an excuse for our team to accept a lower growth rate. And we believe, because we are small in a large fragmented market in the Americas, we can continue to take market share. We expect that we'll continue to take market share. We've got great momentum in the business, and as we referenced earlier, we're growing. We improved our gross margin in the Americas, which is critical. We've done a great job at getting our private-label business launched in the Americas over the last 18 months. So we're happy with the performance of the Americas. Not quite satisfied, and we know we can do better.

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

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Maybe related on that one, the share gains, on Slide 22, you have that great chart of the average order values improving. Can you maybe give some more color per regions? Is it just down to more orders -- more products per order? And maybe a Lindsley stretch target of where that could get to.

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

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Well, if we look at stretch targets, we just use our own group and look at the Americas and where average order value is in the Americas, which is over USD 400. So the average order value varies significantly across the group. Where the NPS is higher, where the customer satisfaction levels are higher, customers tend to buy more from us. Where we have a larger range, customers tend to buy more from us. So I would expect, as we double the range of products in the U.S., that the U.S. number will increase over time. Now the U.S. number is also influenced because we take some planned production orders. We get large orders in the U.S. in general. But as we continue to grow our range in Asia Pac, I would expect our average order value to grow significantly over that time period -- over the time period ahead of us. So stretch, I would say if we can achieve what we're doing in the Americas, that's great. Across the group, we're seeing an increase of up to 10% in average order value across all 3 regions. So there has been great performance in getting customers to buy more from us. The next priority, as we referenced, is getting more customers to buy from us. So we continue to focus on getting more of the existing business and adding to the range, but the key is we move forward over the next couple of years is looking at how we could substantially increase the number of customers that are buying from us and even in the U.K. where we talk about how we have twice as many companies that buy from us in the U.K. as in the U.S. There's still opportunity to grow that customer base.

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Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [6]

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And then just lastly, please, David, can you remind us on the gross margin trends in H1, H2 last year, and so what you expect organically in H2 after that strong 70 bps in H1?

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David John Egan, Electrocomponents plc - Group Finance Director & Director [7]

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Yes. Rory, I think our overall guidance for the full year for our like-for-like base business is flat gross margins. In the second half of last year, we did see some improvement in acceleration in the gross margin, which we'll be trying our best to try and deliver improvement in gross margin in the second half, but our overall guidance is for flat gross margin for the full year. I think where are the opportunities for us? It continues to be in mix in terms of RS Pro, and it also continues to be from a regional perspective in terms of the Americas moving forward on the gross margin. So we're continuing to focus on it. The new pricing tool will also help with us. So it's a key focus. We'll keep working on it. But overall, for guidance at this point in time for the full year, it's flat on the base business.

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

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Henry? Oh, yes.

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Rajesh Kumar, HSBC, Research Division - Analyst [9]

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Rajesh Kumar from HSBC. Just on the Slide 22 average order value, you referred to the fact that it has increased by about 10% at the group level. So when we take that and your 9.8% growth rate and you say that you're winning market share, how do we think about that? You're basically taking a wallet share of the customer, is it?

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

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Yes. So we're increasing our share of wallet with the customer. And it -- a lot of that has to do with what some of our competitors are doing. And it also has to do with us improving the availability and improving our overall service levels with those customers. And as we referenced earlier, sales force effectiveness, that's helped us quite a bit.

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Rajesh Kumar, HSBC, Research Division - Analyst [11]

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Got it. And then we break down that average order value number. So you're saying you're making about $400 in the U.S., about GBP 185 for the group, which is up 10%, and all the regions are broadly up similar. Are we looking at each transaction number or what the customer does through the year?

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Lindsley Ruth, Electrocomponents plc - CEO & Director [12]

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So we look at what the customer does through the year. The group average, by the way, is GBP 191 and GBP 361 in the U.S. But we look at it through the year. And the key actually -- so it's great the average order value is increasing. We also need the average order frequency to increase. So we need customers to be buying more frequently from us and more products from us at the same time.

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Rajesh Kumar, HSBC, Research Division - Analyst [13]

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Okay. So that's your next push, that increase the frequency rather than...

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Lindsley Ruth, Electrocomponents plc - CEO & Director [14]

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So the frequency has not improved this year over last.

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Rajesh Kumar, HSBC, Research Division - Analyst [15]

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Got it. And also, there's a great slide on market penetration where you show U.K. versus China. What's the scale of each of the regions? Is there a structural reason why this has not been done so far? Or is it just an opportunity that was lying there and you...

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Lindsley Ruth, Electrocomponents plc - CEO & Director [16]

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Structural reasons, there are structural reasons that exist within our own company as to why we didn't do it, but it's certainly not in the market. So it's just a failure to execute. It was not having the right leadership, not having the right plan and not -- China is still buying -- Chinese manufacturing companies or Western companies manufacturing in China, they have the same processes, the same manufacturing lines, and they're buying, in many cases, the same products. Now some products are modified specifically for the Chinese market. But people always like to say, "Well, my market is different." But in reality, at the end of the day, most markets around the world are quite similar in terms of how they buy, what they buy, and there are nuances that are slightly different.

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Rajesh Kumar, HSBC, Research Division - Analyst [17]

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If the market is big enough, as a supplier, does it make sense for me to go direct rather than through you?

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Lindsley Ruth, Electrocomponents plc - CEO & Director [18]

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Well, first of all, the suppliers -- so it's a good question. And if you look at suppliers, why do the suppliers use distribution? And there's a variety of reasons over the last 60, 70 years, and they haven't changed, so extending credit to a large customer base. Most suppliers, they're not set up as a distributor. And those that used to have distribution operations, the General Electrics and Westinghouses of this world, spun off their distribution operations years ago because it wasn't their core competency. Manufacturers have a core competency in design and manufacturing products. We have a core competency in delivering those products and now a core competency in doing so in a digital format, which most manufacturers don't have either. So when you look at a market like China, it has nothing to do with pricing or anything in that effect. It's just, how do you reach the mass market, and how do you do so effectively? And we're set up to do that, whereas most manufacturers aren't.

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Rajesh Kumar, HSBC, Research Division - Analyst [19]

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So would you look at inorganic opportunities to buy a supplier's distribution channel, for example, in China?

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Lindsley Ruth, Electrocomponents plc - CEO & Director [20]

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Not today. So we've said and we made it very clear that we view, number one, our top priority is growing organically; and two, we've said, in Asia Pacific, we still need to get our own house in order. We need -- still need to get the basics to the point where we could start looking at acquisitions in the Asia Pacific market. So we never say never. But today, we're focused on our organic story and making sure that our service improves in China as well as in Japan specifically. And then we could look at all options. But the Chinese market's even more fragmented than the market in the Western world. So you have a lot of brokers and a lot of small family-owned businesses, and there aren't a lot of prominent regional players within China, tens of thousands of smaller players. So it's a huge opportunity for us to grow organically. So we don't need to look to -- we just need to get it right ourselves. Henry?

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Henry Carver, Peel Hunt LLP, Research Division - Analyst [21]

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Henry Carver from Peel Hunt. Just sort of Asia Pac follow-on. I mean, you talked about scale there. You have made decent margins at that sort of revenue level in other regions, and obviously, the infrastructure that you've got out there is different for whatever reason. But what sort of scale are you talking about before you can get to these sort of teens or get to double-digit margins in Asia Pac?

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David John Egan, Electrocomponents plc - Group Finance Director & Director [22]

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Yes. I think our overall -- our first phase of the objective was we had to get our house in order. And so that was about leadership, that was about product, that was about cost, to get it at least to a break-even position. The next phase of Asia Pacific is to continue to focus on driving the top line and scale. That will be enhanced by shared services. That will be enhanced by also product -- making sure we've got the right product in the region. We wouldn't sort of -- I wouldn't sort of stand here today and say we have to get to X or Y in terms of top line. I think our view is that we want Asia Pacific to be a double-digit bottom line part of the group, but it's going to be a little bit bumpy in the early stage in these early years. As we said in the commentary, we're focused on China and Japan. We're investing a couple of million pounds to get our website and our digital capability in those 2 markets addressed in the second half of this year. And so it's really just making sure in the first instance we've got the capability and the right to then be able to drive the top line. So it's get our house in order, and then we'll focus in conjunction, in parallel to driving the top line and driving the scale and then ultimately hopefully get -- then getting towards the double-digit profit margin part of the group.

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Lindsley Ruth, Electrocomponents plc - CEO & Director [23]

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Yes, and let me add to that, Henry. We're taking our leadership team to China the first week in January, the mainland China. So most people here, China, they think Hong Kong, but no, we're actually going across the border. We'll be joined by our Chairman as well. What most people don't realize, so yes, manufacturing processes are the same, and the way people buy, to a certain extent, they're buying the same products, et cetera. What is significantly different is the level of innovation in China, the level of engineering and capability that exists today that a lot of people underestimate. And I'm convinced that, I mean, more innovation will come out of China in the next 5 years than the rest of the world combined. And if you look at China, the average age of a buyer and an engineer in China is less than 30. So what does that mean? That means they're all mobile users. That means when you go to a Starbucks in China, you see tons of people sitting there on their tablets and on their mobile phones, their smartphones, placing orders and doing business. And it's quite remarkable when you see the scale of what exists over there. So the one area where we do have to take a different approach, which David has alluded to the investment we're making, is digital. So It's a mobile-first as opposed to desktop-first market today. And we've got to be a leader in mobile, and we've got to do much better in that area. And the way people search and the way people -- we recently met with Google, and this is a statistic from the U.K., that 64% of buying decisions are made during the research and find phase of research, find and buy, that -- so research and find is where they're really making the decision. So in China, you've got to have -- people search differently, and you've got to make sure you have the right content and it's in the right format, and you have the right colors, you have the right filters. And so it's a completely different experience. And it's quite naïve to take the approach we've always taken, which is, Rajesh, what we've done, which is to think that we could take a U.K. site and put it into China and just translate and be successful. It doesn't work that way.

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Henry Carver, Peel Hunt LLP, Research Division - Analyst [24]

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And you make a lot of people changes out there obviously in the last couple of years. Is that now done? Have you got your sort of team in place out there? Or is there more to...

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Lindsley Ruth, Electrocomponents plc - CEO & Director [25]

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We're close.

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Henry Carver, Peel Hunt LLP, Research Division - Analyst [26]

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You're close.

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Lindsley Ruth, Electrocomponents plc - CEO & Director [27]

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We're close. Yes, we're really close. It's -- look, every 2 to 3 years, with the growth rates we've been on and with the moves we're making, it's like we're a new company. And so you have to constantly keep challenging and stretching the leaders of this company. And they've got to step up. And sometimes we're only as good as our last quarter. Goes for me, too, and it goes for all of us. And we have to keep pressing forward, and the potential is so significant it just doesn't happen on its own. So we have to make sure we have the right leaders and the right leaders not for today or for the last quarter but for the next 5 years, right? So that's something we'll keep looking at. And more important to this discussion actually is building the pipeline of future leaders, and that we have not done a good job with, most companies haven't. We have a new focus on recruiting centennials and millennials and making sure we have a diverse pipeline and inclusive culture for the future. Big priority not only in China but around the world. Jane?

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Jane Linsdey Sparrow, Barclays Bank PLC, Research Division - Director [28]

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Jane Sparrow from Barclays. Just on your digital marketing spend, which obviously you've called out as being quite important. Quite a few grumbles from other companies about the sort of cost increases that Google have been putting through for sort of pay-per-click advertising. Just wondered if you could comment on sort of how much of your marketing spend is digital and what sort of visibility and negotiation ability you have over those sorts of cost increases.

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Lindsley Ruth, Electrocomponents plc - CEO & Director [29]

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Yes. It's a big percentage of our overall marketing spend, and that's not to say off-line marketing doesn't take place. But as we just referenced, in markets like China, people are on their mobile phone. They're not sitting around waiting for the catalog to arrive in the mail. And of course we don't print catalogs anymore, but it's a paperless society today. So naturally, more focus is going to be online. And with online, we have a variety of different areas. We have SEO, which is search engine optimization. So you want to optimize your site constantly with content, making sure you have the right content and the right strategy in how you manage SEO. Unfortunately, even with search engine optimization, because paid search is so popular today, it's difficult even with SEO to come up on the first page. So if you're on the second page, it's unlikely that customers will click on you. The cost per click does continue to go up. So we have to be more intelligent about the keywords that we bid on. So Google is actually helping us with that with some of the software, and Google has -- it's more than just a paid search relationship for us. So we're leveraging Google in a lot of areas today to be able to fully exploit the partnership and relationship that we have with them. But obviously, those keywords are going to continue to go up as long as people are bidding on them. And so over time, we need to be less reliant on paid search, it's always going to be important, and do more on our own to drive direct traffic to our site. So -- and that's more -- that's a small percentage. Less than 20% of customers go directly to our site. So 80% are either kind of through paid search or they're going through a site like FindChips or Octoparts that are marketplaces. And so we need more direct traffic to the site.

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Daniel James Hobden, Crédit Suisse AG, Research Division - Research Analyst [30]

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Dan Hobden, Crédit Suisse. Just 2 for me if I may. The first one is the market share gains. Where are they coming from? Who's losing the share?

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Lindsley Ruth, Electrocomponents plc - CEO & Director [31]

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So the market share gains, and by market, we have a list and we track by category where we think we're taking it from. But it's not one particular player. There's hundreds. And it depends on the market and depends on the product category. So it could be U.K. tools and consumables, and we know we're taking more share from X distribution company. But in general, we tend to take more market share from the smaller local distributors that have not invested in digital. They don't have the broad range that we have, and they don't have the service level that we have.

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Daniel James Hobden, Crédit Suisse AG, Research Division - Research Analyst [32]

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Cool. And then actually sort of picking up on that, which -- I sort of hoped was your answer. On Slide 8, you have the bridge of the operating margin, and you've got a sort of 90 basis point -- I wouldn't say drag but investment into digital across that bridge. I suppose how does that continue then? Given it's digital that is differentiating you, do we see -- that 90 basis points, do we see a continued level of investment over the next 2, 3, 5, 50 years?

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David John Egan, Electrocomponents plc - Group Finance Director & Director [33]

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Yes. Look, that basis point drag there was -- part of it was annualization. We had a step-up in investment in digital in the second half of last year, and we've got the first half annualization of that effect. We will continue to invest in digital where it makes sense. So we've called out the increased investment, for example, to address the Asia Pacific piece of the puzzle. We will continually look at this. So I can't sort of give you clear it'll be X or Y. I think we'll be looking at it as a dynamic lever for us to actually drive top line customer accretion going forward.

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Lindsley Ruth, Electrocomponents plc - CEO & Director [34]

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Yes. And just to be very clear, and we have not said this in the past, but we have a very formulaic approach to paid search. So the ROI has to be there. There is a point of diminishing returns at some point. So we're very careful in terms of managing return on investment related to paid search. So as long as we can justify the investment because the return's there, we'll continue to invest.

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Sanjay Kumar Vidyarthi, Liberum Capital Limited, Research Division - Research Analyst [35]

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Sanjay Vidyarthi from Liberum. Just on the data-driven personalization that you were talking about, just interested to understand a little bit more from a CRM perspective how -- what kind of data you're capturing, what you're learning about your customers? And is that about website personalization, homepages and -- or marketing in terms of e-mails and also how the sales team can leverage them.

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Lindsley Ruth, Electrocomponents plc - CEO & Director [36]

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Yes. So personalization and looking at buyer or engineer behaviors is critical for our business. And if you look at we can identify if someone is a maintenance engineer within a, say, a glass factory based on their habits and what they do. And then we can begin to personalize the journey where if we know there are other like role of people -- there are people in similar roles around the world, we know that -- and it is just like you go to that company that has the big website where everybody likes to buy their own personal products. I forget the name of it, but if you were to go to that site and they say -- which we all probably do. And they say those people that have bought this have also bought this and this and this. About 1.5 years ago, my wife and I bought a pasta machine, and about 3 hours later, I get an e-mail, and it's got 27 things on it in the receipt, and she bought all kinds of cookbooks and all kinds of utensils and all that. Well, that's what personalization does. When you know that you like to cook or you start to see the habits of what you're doing, then you can begin to boost that and increase the average order value. So that's what we've been working on this year. The tests we've done have been quite encouraging in regards to the results. So we're pretty excited about the future. And in terms of data, we get a massive amount of data. We're talking more than 100 million, 150 million customer visits to our websites a year. That's not including our designspark.com community were we now have over 750,000 registered users. We get a lot of information -- what they're searching for, what they're looking for, what we don't have that they'd like for us to have. It's a wealth of information, of which we need to continue to focus on how we can improve the way we exploit that information. So IBM has a great chart really, talking about converting data to information to knowledge to wisdom. And I'd say we're probably at the knowledge level of that. So we still can do much better and improve our process around data-driven decisions.

Any last questions? Well, thank you very much for those of you that are in the room today and for those of you that are listening to the call. And thank you for your continued support. And as always, we're available to answer any questions at any time. Thank you.