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Edited Transcript of ECM.L earnings conference call or presentation 12-Nov-19 10:30am GMT

Half Year 2020 Electrocomponents PLC Earnings Presentation

London Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Electrocomponents PLC earnings conference call or presentation Tuesday, November 12, 2019 at 10:30:00am GMT

TEXT version of Transcript


Corporate Participants


* David John Egan

Electrocomponents plc - CFO, Interim CEO & Director

* Debbie Lentz

Electrocomponents plc - President of Global Supply Chain

* Mike England

Electrocomponents plc - President of EMEA - RS Components


Conference Call Participants


* Henry Carver

Peel Hunt LLP, 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




David John Egan, Electrocomponents plc - CFO, Interim CEO & Director [1]


Good morning, ladies and gentlemen, and welcome to the Electrocomponents plc Interim Results ended the 30th September 2019. I'm David Egan, the CFO for the group. Joining me here today to help present is Debbie Lentz, our President of Supply Chain; and Mike England, our President of EMEA, our largest region. In the audience here in London, we are joined by our Chairman, Peter Johnson; and several members of our senior leadership team. These include Debbie Bowring, our President of IESA; Guy Magrath, our Head of Digital and our Single Board Computing Division; Simon Ramskill, our Chief Technology Officer; Michael Cramb, Head of Corporate Development. And if you have a moment after the presentation, we certainly encourage you to get to know and chat to some of our team, please.

Before I go any further, I want to say a few words about Lindsley and the announcement that we made yesterday. Lindsley has achieved a huge amount since he took over as CEO in April 2015, and the business has come a long way under his leadership. As we said in our statement yesterday, he needs to take some time out to receive treatment for a medical condition. Out of respect for his privacy, we will not be discussing further details and most importantly, expect him to return to his position following a short period of recovery in the new year. We look forward to Lindsley's return.

In the meantime, I and the leadership team are focused on business as usual and ensuring continued delivery, execution and outperforming versus our end market is our #1 priority. So let's now take a look at our results.

We're pleased by our performance in the first half. We continue to drive growth and share gains despite a tough market backdrop. All 3 regions saw revenue growth and share gains. RS Pro, our own brand of products, continued to outperform and show share growth. We accelerated investment on strategic initiatives and continued the important steps to set our business up for longer-term success. This investment included both operating investment as well as capital investment, and we'll cover those shortly. Higher strategic operating investment led to a broadly flat profit performance in the first half.

We are managing our operating costs actively and keeping a key eye on our variable costs in weaker markets. But I would like to be clear that we will not short-term this business. Now is the right time to be investing whilst others are pulling back. These investments will be key to drive differentiation and outperformance over the medium term.

So the agenda for today. First, I'll run through the financial results, the regional performance and as well our current trading. Then I will turn to focus on how we are investing in our business, so that we can continue to disrupt and accelerate this performance over the medium term. Mike England will talk about the progress we're making to offer our customers more and broaden our value-added solutions proposition. And then Debbie Lentz will update you on the work we're doing to build a truly customer-centric, lean and scalable supply chain.

Before we talk through today's results, a couple of housekeeping points. First, we've adopted IFRS 16 for the first time in these results. Our prior year comparatives have not been restated for this change. IFRS 16 has had minimal impact on the group profit, but a more meaningful impact on the balance sheet. And full details are provided in the appendix of your packs.

And second, with our increased emphasis on new product introduction, particularly around electronics, we've updated our inventory provision methodology to better reflect commercial reality. The effect on these results in year was not material.

So now turning to the financial highlights. Group like-for-like revenue growth was 4.5%, a continued outperformance versus the market. We saw good growth in industrial revenue, offsetting weakness in electronics. Digital revenue grew broadly in line with group revenue but RS Pro outperformed with 9.7% like-for-like revenue growth.

Gross margin fell 70 basis points on both a like-for-like and reported basis to 43.7%, and this was primarily due to product mix. Adjusted operating profit fell 2.1% on a like-for-like basis, as we accelerated our spend on the strategic initiatives. Adjusted EPS was broadly stable at 17.8p. The interim dividend rose to 5.9p, and we remain committed to pursuing a progressive dividend policy.

Now I'd like to update you on the progress we're making to drive operational excellence and higher operating profit margin over the medium term. Group gross margin fell 70 basis points to 43.7% on a like-for-like and reported basis. This reduction was driven by product mix and related to 2 areas: lower growth in higher-margin product areas such as connectors and electromechanical; and secondly, the repositioning of our electronics portfolio, coupled with the launch of our OKdo products. Going forward, we expect a more modest year-on-year decline in the second half gross margin with growth in OKdo, partially offset by purchasing and pricing actions.

Over the past few years, we stabilized gross margin and after many years -- after many years of decline. And we have a number of initiatives, which we will be -- which will be supportive of our gross margin going forward.

We will continue to grow RS Pro as a percentage of group revenue. We'll focus on driving smarter purchasing and dynamic pricing across the group. We'll improve product mix and pricing in the Americas. And finally, we will continue to expand OKdo into higher margin areas, such as accessories, software and kitting. And for those of you who didn't get a chance to talk to the OKdo team earlier, they will be available after this presentation.

These gross margin initiatives will enable us to continue to expand into new, faster-growing areas such as single-board computing that may come at a lower gross margin, but can actually be accretive to operating profit margin over time. Taking all this together, this will ensure that we continue to drive towards our aspiration of a mid-teen adjusted operating profit margin.

Over the last 4 years, we've consistently increased efficiency and simplified our model so that we can convert a higher proportion of gross profit into operating profit.

Our medium-term strategy will further accelerate this by driving scale and efficiency in areas such as IT and supply chain, and Debbie will cover some of this shortly.

Overall, adjusted operating costs as a percentage of revenue remains broadly stable year-on-year at 32.9%. During the first half, we've made continued progress on driving underlying operating efficiency while significantly stepping up strategic operating expenditure by around GBP 8 million in the first half.

Total adjusted operating costs grew broadly in line with revenue at 4.6% on a like-for-like basis. Stripping out the impact of the higher strategic operating expenditure, cost growth was much lower as continued operating efficiencies largely offset increases in costs related to higher volumes, wage inflation and higher digital advertising.

So now moving on to the summary income slide. Adjusted profit before tax was GBP 103.4 million and was down 0.4% on a like-for-like basis. Excluded from the adjusted profit are charges of GBP 14.4 million, which relate to asset write-downs relating to British steel, amortization of intangible assets and a small amount on restructuring costs. The adjusted tax rate was 23%, slightly down on last year's rate of 24%.

From a cash flow perspective, our first half adjusted free cash flow was GBP 13.9 million. This was down year-on-year due to higher tax payments, inventory investments and higher CapEx. We had an additional tax payment of GBP 11.5 million as guided previously in the period due to changes in the timing of the U.K. tax payments.

We've increased deliberately our inventory to reposition electronics, launch OKdo and to support service levels around Brexit. Our net CapEx rose to GBP 37.2 million with over 2/3 of this spend on strategic initiatives to transform our supply chain and our technology. And this was so that we can scale our business and drive faster market share gains over the medium term. We're making great progress here, and more of this will be covered shortly by Debbie.

CapEx to depreciation was 2.6x in the first half, and we continue to expect the full year to be around 2.7x. We continue to have a very healthy balance sheet. And during the first half, we signed a successful private placement. Our net debt to adjusted EBITDA ratio remains low at 0.9x.

And finally, we've included some guidance in the appendix of your pack. This covers the normal points as well as some detail on our new pension recovery plan.

So just taking a quick look at our regions, starting with EMEA. EMEA starts -- accounts for 63% of the group revenue and delivered 5.4% like-for-like revenue growth during the first half. We believe that this growth has primarily been driven by market share gains. Customer experience continues to improve, and Net Promoter Score was up 5% in the first half. All 3 key sub regions saw positive like-for-like revenue growth trends.

Northern Europe continued to see 5.2% growth aided by strong growth in value-added solutions. Southern Europe saw like-for-like growth of 4.7%, driven by continued outperformance in France. And Central Europe saw 2.1% like-for-like growth with strong growth in some of the smaller markets offsetting a slower performance in Germany, which continues to remain challenging.

Our team in EMEA are focused on continuing to drive new customer growth and to sell more to existing customers via sales effectiveness and enhancements to our value-added solutions propositions, and Mike will cover this shortly.

Good growth in revenue and tight cost control more than offset slightly lower gross margin, leading to a 7.5% like-for-like growth in operating profit and a further improvement in operating profit margin to 15.7%.

Moving on to the Americas, which represents 26% of group revenue. We saw 3.4% like-for-like revenue growth in the Americas. We believe approximately half of this growth was driven by market share gains. We've seen some volatility in the market from month to month, which appears to be driven by uncertainty over the outcome of tariff negotiations.

In quarter 1, we saw some destocking or just-in-time ordering. This appeared to ease in quarter 2, but has reemerged in October with speculation over an easing of tariffs increasing. That all being said, in the U.S., we do have an order book due to the type of customer and product range that we offer. Our order intake in the U.S. remains strong. And it is clear that the actions we took in the first half to refocus and reinvest in our sales force mean we continue to drive outperformance in our Americas business.

During the first half, we appointed Ken Bradley, who has spent the last 2 years on the leadership team here in Europe, to lead the Americas. He's already set out a clear direction and is making great progress.

The first steps to reinvigorate our sales team, drive sales force effectiveness and improve our marketing are now well underway. We will continue to broaden the range in the Americas and improve our offer with a focus on RS Pro and value-added solutions.

Gross margin in the Americas reduced in the first half, primarily due to product mix, lower gross margin and the increased investment in our sales force has led to a 7.1% like-for-like reduction in operating profit to GBP 31.3 million.

And then, finally, Asia Pacific, in terms of our regions. Asia Pacific accounts for 10% of revenue and is made up of 4 similarly sized subregions. Overall, APAC saw like-for-like revenue growth of 1.7%. We saw strong growth and market share gains in both Australia and New Zealand and Southeast Asia. However, our performance in Japan has been impacted by a high exposure to board-level electronics, while China continues to be impacted by our go-to-market offer and digital capabilities.

We continue to make progress on both improving the customer service and efficiency within the region. However, we still have work to do to build the right local offer and online experience, particularly in China, and this remains our key focus.

During the first half, we increased investment to build the right talent and capabilities in digital and inventory to take us on that journey. Despite this higher investment, the region remains profitable. We'll continue to focus on driving scale to improve profitability over the medium term.

Current trading. Over the first 6 weeks of the second half, we've continued to deliver good outperformance and modest growth despite weakness in some of our key underlying markets. We saw market share gains in industrial and strong growth in RS Pro, which were largely offset by ongoing softness in electronics.

We are continuing to invest in supply chain and technology to drive further differentiation and share gains whilst accelerating cost actions to support near-term performance. Overall, we are well positioned to deliver good progress.

Moving on now in terms of how we can continue to disrupt and accelerate our performance. So what are we doing? We have numerous actions going on right across our business, and that will continue. Digital and mobile remain at the front of our agenda, and we continue to advance our mobile-first approach. We've made good progress in electronics with some important steps to broaden our franchise position and completed with more to follow in terms of those opportunities. We've launched OKdo and built an exciting road map of new partnerships and franchises in the fast-growing single-board computing and IoT market.

We do have a strong leadership team that has continued to perform despite the external challenges. And so we thought today that it would be good to bring Mike and Debbie up to talk about 2 of our key strategic initiatives: one, to improve our offer and roll out value-added solutions, which Mike will cover; and then, secondly, how we're going to build a truly centric, lean and scalable supply chain model, which Debbie will cover.

And so with that, I'll hand over to Mike, who will cover the first topic.


Mike England, Electrocomponents plc - President of EMEA - RS Components [2]


Thank you, David.

So yes, Mike England. I've been with the business now for 4 years this Friday. It's been a really exciting journey. I've been in this industry for 23 years, and it's been a real privilege to be part of the Electrocomponents team and to be supporting the transformation of the business.

We really are at the start of our journey. We've built some very strong foundations over the last number of years. We've put a real focus right across the business around driving the right culture and behaviors in the organization, something that I know that Lindsley and the whole of the leadership team have been incredibly passionate about. And underpinning that, an intensive focus around our customers and making sure that everything we do is focused on what the customer needs and ultimately, as well as a distributor, making sure at the same time that we support our suppliers and are able to take to market the offerings that our suppliers are looking for.

So on that note, just worth reflecting on the size of the market. Because whilst we have had some good progress, our market remains enormous for us. And in fact, in all of the markets we operate, we have less than 5% market share. And as I would regularly say to all of the commercial leaders in the business that means that there's a 95% growth opportunity to go after. And whatever is happening in the external world, we have to remain confident and that if we build the right capabilities and we drive through on our strategy, we can succeed.

But this is an important point for us, as David has mentioned, about investing also for the midterm and the long term. So some of the things that I'll just bring to the table now for you are some of the investments we're making, and I'll also just spend some time talking about why we're doing what we're doing and what that means for our customers as well.

So you'll see here a pyramid, which effectively is a summation of how we view our markets. We segment our customers over on the left-hand side into 3 categories. We have our standard customers, which tend to be small, medium-sized enterprises, are looking for a transactional relationship with us and really just want to come on to our website and buy products and have a great customer experience.

We have our key customers, which are mid-sized organizations, mainly based within one market, and they have a medium spend potential with us, but are also looking for a high level of value, and they're looking to consolidate more of their purchases to fewer suppliers.

And at the top of the pyramid, we have our corporate customers, who are often international or they're national. They have multiple site locations, often have central procurement, and they have a significant spend in many instances where they're looking to consolidate a lot of their indirect spend and also their direct spend to fewer suppliers on that consolidation journey.

Beneath that, we work very hard to look at the vertical industry segments that we're wanting to target, making sure that we are focusing on highly profitable growth areas and also moving more into those noncyclical industry segments, which give us a great sustainable business.

And then, finally, right down to the customer persona. There are many different types of customers within our overall customers that we serve, and we need to make sure that we create differentiated offers that talk to and service the needs of those individuals within those companies.

So if we just break that down. And just as an example, for Europe, we see Europe and EMEA as a 100 billion marketplace. And whilst we always will know that there is a higher number of standard customers to go after. Actually, when we break down the spend opportunity or the potential opportunity, we see 1/3 in corporate, 1/3 in key and 1/3 in standard. So we want to make sure that we build out our capabilities as an organization to service the needs of those 3 customer segments.

So let me move over on to the right-hand side to explain a little bit more about the areas that we're focusing on and the areas that we're investing in. Certainly, for all of our customers, as David has called out, we continue to invest in our user experience, our digital user experience. Mobile-first is a critical enabler. And whilst we have built good capability, we're very excited of the work that's happening at the moment to enable us to enhance our responsive website capability as we go into the start of our next financial year. And this is very important to make sure that we're always creating that ease of experience for our smaller customers as well as for our larger customers.

But as we move into our corporate and key customer base, these are customers that are seeking much more value from our organization. And so when we talk about value-added solutions, we really do see that there are 4 areas of focus for us.

And a typical customer, it could be a large corporate customer or a key account customer, would certainly be looking to reduce their total cost of procurement, not just the reduction of the price of a product. But certainly, the total cost associated with the procurement of products and B2B companies in the product ranges that we supply would have an average order value of about GBP 150. And the CIPS will tell us -- the Chartered Institute of Purchasing and Supply, typically cost them GBP 90 to raise that purchase order. So anything we can provide as an organization through our eProcurement platforms enhance opportunity for us to help customers to consolidate through digital media is certainly going to meet those needs.

So we're investing to enhance our eProcurement offerings. We've launched recently in the U.K. market a new service called ConnectPoint, which is a digital kiosk, which we've launched out into a number of customers, and there's quite a lot of excitement about that. And for the very large customers, right at the top of the pyramid, actually, those that are mature enough to want to outsource all of their indirect material requirements to IESA through the business process outsourcing model and their business offers.

The second area is around inventory. And most of our customers, whether they're building or whether they're maintaining are carrying a high level of inventory, spare parts or production parts, and they're carrying working capital and they're carrying cash. And certainly, there is a real drive from our customers for us to provide solutions that helps them to reduce the costs associated with their inventory. And we've been very excited in our Northern European market, to be the leaders in some new solutions, some open-bin stocks solutions called ScanStock, which has been rolling out to a wide range of customers in the U.K. and Northern Europe market. We're piloting industrial vending. And again, for those very large customers that are looking to outsource the complexity of that inventory management, we have the opportunity for the IESA platform to provide a complete outsourced stores solution for those large manufacturing companies. So building that portfolio of inventory solutions is very high on our agenda.

For those companies that are in the maintenance environment, we're seeing a very big pull around the industrial Internet of Things and Industry 4.0, and companies are really wanting to partner with innovative suppliers that can help them on that journey towards connected factory and connected buildings.

Our acquisition of a small business in the U.K., Monition, has enabled us to provide a platform, which we believe is scalable and to take across the world. On the other side, working with our suppliers to look at solutions that can provide cost savings for customers around products that can last longer and be more efficient is very, very critical.

And then, finally, we talk about design and innovation solutions. And really, this talks to all of our customers up and down the pyramid. We have a fantastic community called DesignSpark, where we have 850,000 members worldwide, and that use community to come and find new product innovation. They come and use this to learn about new technical innovation in the market as well as downloading free software that we believe is really adding value in the design phase.

And then the emergence of OKdo in single-board computing is a key channel, along with electronic solutions that we're developing along that design and innovation area. So these 4 areas for us are critical. Without them, we can't attack all of the market because certain customers demand that we provide these. We have some great solutions in place in some of our mature markets like Northern Europe, and our goal now is to lift and shift those solutions, and we take them across our markets around the world as well as leaving our regions to be able to create their own solutions relevant for their markets and also take some experiences from Asia Pac and the U.S. and bring that back into Europe.

Second area is around full range supply and product, which I'm going to come on to. And the third area, ultimately, is about how do we go out then and market and sell the solutions and the offer as we move forward.

So on that note, I'll move forward. We've done quite a lot of assessment around the product categories that our customers are ultimately looking to consolidate and really assessing where we are today in relation to our product range fulfillment for those customers, but also where we sit alongside some of our larger, more mature competitors.

The good news for us as an organization is that we already have a very, very broad range of products across the categories that our customers are looking to consolidate. What we now want to do is we want to accelerate the completion of those ranges, and we want to ensure that we can provide that end-to-end solution to our customers, underpinned by the value-added solutions that I talked about.

We can see that in some areas we don't have a completed ball. We are targeting some areas where we know we can accelerate our growth and also in other areas where we need to build our capability and we need to build our technical capability and expertise. This also helps us and leads us around our inorganic targeting as well.

And needless to say that our private-label business, RS Pro, which is currently at 12% of our total business, is a key area of focus here around how we accelerate. Now the enabler here to ensure that, that happens is an investment in new technology. We've kicked off a new program, which we call Product and Content Excellence in our world, it's called PACE in April, which consists of 2 things, really. It consists of a new document management system to allow us to manage the technical data that our customers are looking for more effectively within our systems. We launched that last month. Some great work by our teams. And that's enabling us to move from 500 technical data sheets a week to thousands a day. So it really has transformed the way in which we're able to operate in that space. And then the secondary, which is more significant, is around the new products' information management system. This new system is currently in a test phase at this point in time. We're starting to build out the capability. And what this will enable us to do is 3 things.

One, it will allow us to significantly increase the product range that we have today, doubling our stocked offer and significantly increasing our nonstocked offer as well as our private-label range. Because today, we have limitations on our existing pin around the capacity for the products that we can house.

Secondly, the ingestion of content and the ingestion of supplier information into our website. Today, it's not as fast as we want it to be. The new PIM will make this days, and this is really critical to our suppliers.

And finally, this will significantly improve the user experience. It will give customers a quicker search, it will allow them to have a better journey when they're looking for products and we can tag value-added solutions from the product pages that they may be interested in purchasing. So all of this is designed to target the key, the corporate, the standard customer, and it's all about helping us to accelerate share of wallet. And that's the investment we're making here.

And then, finally, just a word on what we actually call the boot camp. But this is really about how we've kicked off a value-led selling effectiveness program across the world to ensure that we properly equip our marketing, our sales and our technical organizations so that they can take these solutions and these enhanced product offerings to market in a very effective way and in an aligned way with a consistent value proposition worldwide.

We brought together in September, end of September, early October, 60 of our commercial leaders, our country managers, our sales directors, our marketing directors into Frankfurt. We had Ken and Ken's team from the U.S., and we have the team from Asia Pac come over as well as the European leaders, which was a great opportunity to kick-start this program and to get everybody aligned on a consistent value proposition, an aligned way of going to market, and importantly, sharing best practice across the group to take where we've really driven hard our value-selling effectiveness program in some of our mature markets, where we can see real success and start the journey to roll that out into our other markets. It's also important to build the road map of how we're rolling out value-added services and solutions across the world because this isn't just a case of building a sales capability, but we need a sales-to-service delivery capability, which this has also kick-started.

So just in terms of the summary then of these 3 areas. Number one, building out a value-added solutions portfolio and rolling that out across our markets. We're making very good progress, and we look to see an acceleration of rolling those out into our other markets, certainly in the next 6 to 12 months. And we're moving at pace to do that kicked off by the value selling boot camp that we've recently done.

Secondly, in terms of our product range expansion. For us, this is a 2-year journey. But we're going to be looking to see how we can extract commercial leverage as we embark on that program, working with suppliers where we believe that we can go faster and we can accelerate market share gain.

And thirdly, we have a really important differentiator in our business which is that we have a great digital capability and a great supply chain that Debbie is going to talk about. But actually, for our key and corporate customers, they do value the human touch. They value an account manager. They value technical knowledge and support and they demand value and expertise. And so if we can upscale our customer-facing people to be far more value focused, then we believe this is going to put us in good stead to win both short, medium and long term.

Our purpose in our organization is about making amazing happen to inspire, to innovate and to deliver. On that notion, I'll pass over to Debbie, who's going to talk to you about our supply chain.


Debbie Lentz, Electrocomponents plc - President of Global Supply Chain [3]


Thank you, Mike, and good morning, everyone. I'm Debbie Lentz, President of Global Supply Chain. I, too, have an anniversary this week, did not know that about you, Mike. So I joined the company 2 years ago tomorrow. So what an amazing journey I've had and having a lot of fun while I'm doing it.

So what have I been doing for the last 2 years? Well, firstly, started with revamping our strategy. And our supply chain strategy, we're very, very proud of and actually quite transformational. So historically, we are very, very focused on costs. And yes, that's an important thing since we are accountable for the majority of the costs of the company. But it needs to be very customer-focused. That customer needs to be in the heart of everything we do, and we have to make sure that, that is our priority first. So delight that customer and do that effectively and efficiently.

The other things that I'd like to share about our strategy is certainly that first bucket customer first is first and foremost, as I said, but it's also about building a high-performance team within supply chain and joining the rest of the company, both supply chain expertise and those leadership abilities. We do own costs for the company, the majority of which, as well as inventory. I also have responsibility for pricing. So I dabble in gross margin a little bit as well. So I focus on cost savings, inventory savings, gross margin, but doing that all with delighting our customers and make sure -- making sure inventory is available for our customers when and where they want it.

The fourth bucket is end-to-end processes and doing that with continuous improvement and lean, and we've rolled that out operationally across supply chain as well as the company.

And then, lastly, innovation in supply chain. What is the automation? What is the technology and the systems that we need to be innovative in the industry? So with that, I brought along a little video that might give you a snippet of what we're doing. Could you roll that video, please?



Debbie Lentz, Electrocomponents plc - President of Global Supply Chain [4]


So as you can see, much more customer-focused and all about that delivery, speed, quality, meeting our customers' expectations, but at the same time, reducing costs and doing that efficiently.

So all about the tagline and the video, delivering products when and where they need it, on time, every time, and we're very proud of that.

I want to talk a bit about infrastructure and about some of the initiatives, some other initiatives that we've done in addition to that. So one of the platforms in our strategy was looking at our distribution center network and actually doing more than looking at it and really evaluating the right locations to meet our customers' need to focus on that speed, but at the same time, locating those distribution centers in the right place from a cost effectiveness.

So we did -- we spent several months studying that. And we ended up deciding to expand our existing distribution center in Fort Worth, Texas in the United States and our existing distribution center in Bad Hersfeld, Germany. It's about 1.5 hour drive north of Frankfurt. And we did that again because those are positioned in the right places to support our growth, to enable speed and delivery, but also quite cost-effective from an efficiency and a transport perspective. I'll get into that in a bit -- a little bit more. I've gotten pictures for you.

So what are we doing? So we're expanding both facilities, we're leveraging automation, we put in quite a bit of mid-level robotics, and we're upscaling our warehouse management systems to make them more efficient and very innovative. Certainly, we're building them for the future and to support our strategy, destination 2025, and you'll hear a bit about that later.

We also kicked off a transport optimization initiative. What does that mean? Well, frankly, we have had a lot of complexity. We're kind of in the middle of it right now. Over 30 carriers globally, very suboptimized. And transportation is all about shipping the truck full in all directions and how do you make sure that happens working along with carriers, but less carriers in a consolidated way. So we're stepping that up. I would say we've barely managed transportation in the past. And so we've got a key focus on that and managing that much more effectively. Again, not losing sight of our customers, delivering on time every time.

And then, thirdly, we've opened shared services across the globe and have specifically opened Center of Excellent offices in 3 of our regions -- in our 3 regions.

So in APAC, we've opened a Center of Excellence, COE in Foshan, China. In Corby, which is a pretty big operating center for us, Corby in the U.K., and we're just about to open one in our Fort Worth facility in the United States. And those shared services are all about streamlining processes, simplifying those processes and leveraging our scale around the globe.

We're focused on those transactions, streamlining those end-to-end and also putting some automatic robotics in that can address automatically those transactions and repetitive things that happen in the back room from an administration perspective. So we're working on accelerating that. We've started that in our China facility.

So just a key point in summarizing this slide. We're all about customer first. The customer is in the center of everything we do. We've transformed our strategy. And yes, we've got to be efficient. We've got to reduce cost. But that customer is -- delighting that customer is that main goal and doing that in an efficient way.

Because we have the advantage of our distribution center locations and the automation we've put in, our transport and our shared services, we do anticipate a reduction of our costs by 1% to 2% of cost of a percent of revenue. That's over the midterm, and we're very, very excited about that. So delighting that customer and taking significant costs out is something that I'm very, very proud of.

So just a bit more on our distribution centers. I thought it would be helpful to see a few pictures. So here's our facility in the Americas. Again, Fort Worth, Texas, and that is planned to be completed by June, actually up and running and fully operational by June 2020. And as you can see, we've got a building and actually, inside that building, most of our automation is installed, and we're in the midst of putting in our upgraded warehouse management system and preparing our product plan for that inventory that will go in there.

So that, as I said, will be operational in June 2020.

Our distribution center in Bad Hersfeld, it's exactly the same plan, but a year later. So talking about scale, exactly the same plan a year later. We've just about had the building -- this picture is actually a week or so old. So that roof is now finished. We've got most of the walls up and we'll be getting -- pouring the floor, putting the automation in.

And then there, we've significantly upgraded our warehouse management system, and we will be starting that next year. So very, very exciting. This will enable us to have 2x the capacity, both from a storage perspective and a throughput perspective, doing that in a much more productive way. They're in the right locations in terms of delivering that -- delivering with speed to our customers, but also efficiently from a transport and a location perspective.

And most importantly, it is a strategic investment to support our growth going forward. And that's out the next 5 to 8 years. So significant investment, which will enable us to double the size nearly -- more than double the size of our capacity and more than double our product range, which Mike and David mentioned earlier.

So we're very proud of what we're doing. This is only a few things. But it's all about becoming first choice, supporting our destination 2025. And I've got to add a little bit of a supply chain tagline on here. To be the first choice, supply chain delivering excellence across the globe.

And with that, I will hand it over to David.


David John Egan, Electrocomponents plc - CFO, Interim CEO & Director [5]


Thanks, Debbie. Thanks, Mike. So let's pull all this together.

So pulling this all together, we continue to believe that we remain uniquely positioned in this large market place. We've got a strong team and a clear strategy in which we are making good progress at executing. We will continue to use uncertainty in our markets as an opportunity to invest, to drive greater differentiation so that we can continue to disrupt and accelerate. We are a cash-generative business with attractive returns on capital employed. We will continue to invest wise -- invest the cash wisely, whether it be organically or through digestible bolt-on acquisitions to further accelerate the delivery of our strategy.

We will focus on our strategic investments and the superior returns that these will deliver over the medium term.

And finally, I really believe that we've got a leadership team that remains extremely excited by the significant opportunities that we've got out there, and we will continue to deliver. With

that, I'll hand it over for Q&A.


Questions and Answers


Henry Carver, Peel Hunt LLP, Research Division - Analyst [1]


It's Henry Carver from Peel Hunt. Just one, actually, for me, a reminder on the Net Promoter Scores across the group. Obviously, they're up, which is good news. But I just wanted to feel for what the sort of high watermark is and what needs to be done still in Asia, I guess?


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


Sure. I guess the best NPS that we have across the group is in the 70s, in the low 70s. And I guess, from an external perspective, world-class or very good, best-in-class is certainly in the 70s. And so whilst we haven't set a ceiling or -- it's sort of one step at a time for us. So the group is in the 50s. Our Allied business or our North American business is in the high 60s. So we have our own internal aspirations that we certainly like to drive the NPS scores forward in all markets, and that's Europe and the Americas. We still think there's opportunities in the Americas.

Certainly, the low watermark for us is APAC, but we still need to get some of the basics in place there before we can continue to see significant step forward progress in that market. So it's a high priority. It's part of our leadership incentives and so we want to really delight our customers, put customer first, but we're a long way from where we think we can be over the medium to long term.


Sanjay Kumar Vidyarthi, Liberum Capital Limited, Research Division - Research Analyst [3]


Sanjay Vidyarthi, Liberum. I got a couple of areas for questioning, please. First, in terms of supply chain costs and that 1 to 2 percentage points of savings versus sales. Are you able to give any idea of what proportion of sales supply chain costs are? And within that, can you separate out or give some idea of the kind of DC costs versus delivery costs?

And within delivery costs, are there any kind of initiative looking at in terms of -- obviously, you have kind of free next-day delivery, but you're looking at the elasticity of demand as to how you can kind of manage that in terms of premium propositions for delivery?


Debbie Lentz, Electrocomponents plc - President of Global Supply Chain [4]


Why don't I start there, David, and you can talk through some of the numbers as well.

So our total cost of percent of sales from a supply chain perspective is 9.5%. Now we've got some things in there like facilities, including offices. So it's got some unusual things in there, if you will. You asked about freight. That's 3.5% to 4%, circa 3.5% to 4%, part of that.

In terms of premium delivery, it's about premium delivery to certain regions. So for the vast majority of Europe, we are overnight. We're within 24 hours of delivery, which is best-in-class. We also offer same-day delivery. Where we need some work is in APAC. And then in the United States, the vast majority of the states are reached within 24 hours, but not the outliers, like Portland, Oregon and Alaska and those sort of things. We're working on that as well.


David John Egan, Electrocomponents plc - CFO, Interim CEO & Director [5]


And in terms of the elasticity, I think sort of the first step for us is to get the 2 DCs up and running. We will gradually bring in the new inventory into that, again, sort of a gradual introduction. We're not just going to flood these DCs and trash the inventory turn -- or sorry, reduce the inventory turn materially. But we're looking to -- it's very much a planned introduction of new inventory. As we then scale up those 2 facilities, we will certainly get some leverage, which is part of the operating efficiencies that Debbie referred to earlier.


Sanjay Kumar Vidyarthi, Liberum Capital Limited, Research Division - Research Analyst [6]


Okay. And one other question. On the strategic investment, OpEx and the GBP 8 million in the first half, I think you've talked in the second half about some mitigation from efficiencies. But can you give us some idea of what the strategic investment is like to be in the second half?


David John Egan, Electrocomponents plc - CFO, Interim CEO & Director [7]


It will be -- we will offset some of it with the savings initiatives that we've got underway. And so it certainly won't be -- it won't be equivalent to the GBP 8 million in the second half. It will be a smaller number than that.


Rory Edward McKenzie, UBS Investment Bank, Research Division - European Support Services Analyst [8]


It's Rory McKenzie from UBS and asking the first question to you, another Mike. You mentioned how now is the time to invest as customers feel the pressure. And maybe your competitors do as well. You're growing share already, but which areas of that pyramid you talked about, do you see the biggest chance of disruption and gaining share? I guess it's not quite like the high street where CVAs takeaway capacity. So how is that actually playing out in reality at the moment?

And then, David, and then maybe Debbie actually on the gross margin. It sounds like you should expect the same dilution from mix through H2. You mentioned price initiatives. Can you give more detail about which areas you can push on that and what we should expect?


Mike England, Electrocomponents plc - President of EMEA - RS Components [9]


So the answer to the first is that we actually want to win in all 3 and actually, the initiatives that we're driving, when I talked about the user experience and looking at how we want to really drive that mobile-first capability as well as improving the overall end-to-end web experience. Whilst that's highly targeted at the standard customers, the small customers, and we want to bring much more visitors into the shop. At the same time, that capability will also assist us in building out the value-added solutions capability because everything that we do and everything we develop, we want ultimately to be standing on the same platform, so the customers can have a true omnichannel experience. I think the value-added solutions and the product range expansion that we've talked about are very much targeted at the larger customers, who are very much seeking that consolidation journey. And the reason why I think that, that is important for us to call out is that the markets are consolidating, the customer market is consolidating. So we're having a stronger demand for Pan-European customers that want to consolidate multiple -- multigeography as well as global customers that are also seeking for us to be able to provide them with that opportunity worldwide.

So actually, they're demanding us to have a similar capability in all of our markets and be assured that we can provide those solutions where they're operating. And we're seeing already that where we have put these solutions in place and where we're demonstrating, that we can expand out the product portfolio. We're winning more business than we were winning before. We're gaining much more opportunity than we were gaining before. And actually, if I go back to when I joined the organization 4 years ago, I think this business was seen as quite a transactional company and perhaps seen by customers as being the second supplier or the supply they go to when their primary supplier can't service them. And I truly believe that we are changing that mindset with our customers through that pyramid and to be an organization that is seen to truly add value.


Debbie Lentz, Electrocomponents plc - President of Global Supply Chain [10]


So David, I'll start a little bit on the pricing tool and I'll let you answer the rest of it. So something that I did not mention, which is part of our strategy, is we've put in a new pricing tool, which we're very excited about. And we're in the midst of rolling it out. So it certainly isn't all the way at its destination.

But what that enables us to do is be more competitive. It scrapes -- does things like scrapes websites, researchers automatically what our competitors are doing in the marketplace. And that's overlaid by our colleagues that work very closely with Mike's group, as an example, on what's happening from a local perspective. You put that all in the tool and it enables us to be much more effective in an automated way. It also gives us an opportunity to do more dynamic pricing as we choose to do so versus what was once very laborious and manually keep punching things into a system. So we're really excited about that.


David John Egan, Electrocomponents plc - CFO, Interim CEO & Director [11]


And from a gross margin perspective, we've guided that we do expect to see some moderation in the gross margin in the second half, but we do anticipate that the margin will be -- the gross margin will be down for the full year, although we'd like to obviously address that, but we are guiding for it to be down for the full year.

There are a number of factors. One is there's pricing initiatives that we've got ongoing, but also there's the buy prices which we're working with our suppliers. And so again, we're looking at this from all angles. There is some mix effect. It's both product and geographic, but we're just dealing with it as best we can, and we understand the importance of gross margin, our teams do. And we'll continue to focus on it accordingly.


Unidentified Analyst, [12]


Good morning. Can I ask a question on 2 areas, please? Just first of all, coming back to the U.S. So what comfort can you provide us just regarding some of the drivers in revenue into over the last month or 2? So I think you dealt with this pretty effectively in the text but just to confirm that the distribution center, presume, is not creating any disruption for the business at this point in time.

You mentioned that the order book is up. I wonder if you could give us some details on that. In the past, you've talked about book-to-bill ratio in the states. So maybe that's something that might be well-timed to share with us now? And secondly, if we think about tariff effect in the U.S., which parts of the business are affected by that? Because presumably, not everything that you stock are impacted by tariffs and therefore, why we've got uncertainty, about having an impact on the business at this point in time.

And then a really easy one. Could you just compare the terms of your new USPP issue relative to the old one, please?


David John Egan, Electrocomponents plc - CFO, Interim CEO & Director [13]


Great. Thanks for those 4 questions. Fine.

So let's start with tariff, the direct impact on tariff to us as a business in the U.S. is minimal because the number of products that we are selling, it is very small, the percentage there. The indirect impact in the supply chain is quite significant. So what we've seen is that the end customers or manufacturers. OEMs are actually trying or are taking inventory out of their supply chain so that they don't get caught with high tariff products that then the tariff then reduces or is eliminated. And so we've certainly seen a contraction in the demand, and it's been sort of a bit more sort of a bit like a roller coaster.

What we've seen in terms of the drivers of the revenue, we've seen a very strong order intake in the U.S., we just haven't seen the call offs during particularly the month of October. We've seen customers have then booked those call offs. And so our bookings for shipments in the month of -- sorry, in the month of December are very, very strong for this point in the cycle. And so we're very -- we remain confident that there is certainly a changing in the dynamics in the marketplace, but the underlying mechanics or dynamics within the marketplace are not necessarily changing. It's just a timing factor.

We don't -- there's certainly no impact from the warehouse side of it. It is segregated. And so the existing warehouse is not being impacted whatsoever. The order intakes up, the tariff effect is minimal direct. And then in terms of the USPP, it is longer term. So we have 7 to 12-year time periods. We have U.S. dollars and euros, and it comes -- but it comes at a slightly higher interest cost. But we felt that given the circumstances in the market, it was exactly the right thing to do to refinance accordingly. But we can provide full -- I think we have announced, although we can provide full details, certainly in terms of the terms.

I think that's it. I'd just like to thank you all. As I said, we're on a journey, we're committed and we'll continue to progress. And so thank you for your time.


Mike England, Electrocomponents plc - President of EMEA - RS Components [14]


Thank you.


Debbie Lentz, Electrocomponents plc - President of Global Supply Chain [15]


Thank you.