Electrocomponents PLC 2017 Half-year Financial Results (4988P)

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Electrocomponents Plc	LSE:ECM	London	Ordinary Share	GB0003096442	ORD 10P

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Electrocomponents (LSE:ECM)
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RNS Number : 4988P

Electrocomponents PLC

18 November 2016

ELECTROCOMPONENTS PLC

RESULTS FOR THE HALF YEARED 30 SEPTEMBER 2016

PERFORMANCE IMPROVEMENT PLAN DRIVES 45% UNDERLYING H1 HEADLINE PBT GROWTH

 
                                                         Underlying 
                           H1                              Change 
 Highlights                2017      H1 2016    Change       (1) 
 Revenues               GBP706.3m   GBP626.5m   12.7%       2.1% 
 Gross Margin             43.6%       43.3%     0.3pts     0.3pts 
 Headline operating 
  profit(2)             GBP57.7m    GBP33.8m    70.7%      42.1% 
 Headline operating 
  margin(2)               8.2%        5.4%      2.8pts     2.3pts 
 Headline profit 
  before tax(2,3)       GBP55.1m    GBP31.3m    76.0%      44.6% 
 Headline earnings 
  per share(2)            9.1p        5.2p      75.0%      56.9% 
 Headline free cash 
  flow(2)               GBP61.9m    GBP11.8m    424.6% 
 Net debt               GBP140.9m   GBP169.6m   16.9% 
 Leverage (x EBITDA)      1.0x        1.6x      37.5% 
 Interim dividend         5.0p        5.0p        - 
 
 Reported profit 
  before tax            GBP54.5m    GBP19.9m    173.9%     85.3% 
 Reported earnings 
  per share               9.0p        3.1p      190.3%     143.2% 
---------------------  ----------  ----------  -------  -----------

(1) Underlying growth, unless otherwise stated, is adjusted for currency movements, in addition underlying revenue growth measures are also adjusted for trading days. Positive currency movements increased Group reported H1 revenues by GBP58 million, additional trading days boosted Group H1 revenues by around GBP8 million.

(2) Headline measures of profitability and cash flow are defined as the relevant reported profit/cash flow measure before reorganisation costs/cash flows, asset write-downs or disposals.

   (3)     Positive currency movements increased headline profit before tax by around GBP7 million.

Financial highlights

-- Revenues were up 12.7% aided by foreign exchange and extra trading days. Underlying revenue growth was 2.1%.

-- Underlying revenue growth increased to 3.1% in Q2 (0.9% Q1) as North America and Asia returned to growth.

-- Gross margins improved 0.3% points driven by initiatives on pricing and discounting discipline.

-- Reported PBT of GBP54.5m was up 174% aided by a significant reduction in the exceptional charge year on year.

   --      Headline H1 PBT of GBP55.1m was up 76% and 45% on an underlying basis.

-- 'Simplify - Operate for Less' actions drove a 2.3% points underlying improvement in operating margins to 8.2%.

-- Strong headline free cash flow was up GBP50.1m year on year, with improved stock turn 2.8x (H1 2016: 2.5x).

   --      Reported EPS was 9.0p up 190%. Headline EPS was 9.1p up 75% or 57% on an underlying basis. 
   --      Interim dividend maintained at 5.0p.

Operational highlights

-- 2017 cost savings ahead of plan: GBP13m delivered in H1. Raising March 2017 savings target to GBP18m versus GBP15m.

-- We now expect to deliver GBP30m of total annualised net savings by March 2018 (previous guidance at least GBP25m).

   --      Significant progress in Asia Pacific, losses reduced to GBP4.2m versus GBP13.2m in H1 2016.

-- Improved customer experience: Group customer satisfaction rating (Net Promoter Score) up 9% to 42.1.

-- Online customer satisfaction up 60% year on year in August 2016. Online speed improved by 33% year on year.

-- Successful repositioning of own brand range, RS Pro, (12.6% of revenues) with 6.6% growth in H1.

CURRENT TRADING & PROSPECTS

We have made an encouraging start to the second half of the year, with all hubs seeing an improvement in underlying revenue growth in October versus the Q2 trend. The return to positive revenue growth that we saw in our North America and Asia Pacific hubs in Q2 has continued. Northern and Southern Europe are again seeing good growth, while Central Europe returned to modest growth in the month.

We have raised our cost savings guidance to GBP18m of net savings in 2017 and total annualised net savings of GBP30 million by March 2018. Work continues to identify further efficiencies and simplify the way we operate. All these actions mean that we are well positioned to make strong progress in the year to March 2017.

LINDSLEY RUTH, CHIEF EXECUTIVE OFFICER, COMMENTED:

"One year on from the launch of the Performance Improvement Plan, I am extremely pleased by the progress we are making to put the customer back at the heart of this business, increase accountability and operate for less. As a result of our actions we have seen significant growth in both profits and cash flow during the first half of our financial year. However, while we have taken a major step forward, we are only just at the beginning of this journey and still a long way from best in class. We remain extremely focused on delivering a further step change in the performance of this organisation and are excited about the significant potential for further improvement and growth."

Enquiries:

 
 Lindsley Ruth, Chief Executive        Electrocomponents          020 7567 
  Officer                               plc                        8000(*) 
                                       Electrocomponents          020 7567 
 David Egan, Group Finance Director     plc                        8000(*) 
 Polly Elvin, VP of Investor           Electrocomponents 
  Relations                             plc                       07973 812481 
                                                                   020 7353 
  David Allchurch / Martin Robinson     Tulchan Communications      4200

* Available until 12:00 on 18 November 2016, thereafter 01865 204000

The results statement and presentation to analysts are published on the corporate website at www.electrocomponents.com.

Notes on financial terms:

In order to reflect underlying business performance, comparisons of revenue between periods (including by region, product group and channel) have been adjusted for currency and trading days (underlying revenue growth).

Changes in profit, cash flow, debt and share related measures such as earnings per share are, unless otherwise stated, at reported exchange rates.

Sign conventions: % changes in revenues and costs are disclosed as positive if improving profit and negative if reducing profit.

Key performance measures such as return on sales and EBITDA use headline profit figures.

Notes to editors:

Electrocomponents has operations in 32 countries. We offer more than 500,000 products through the internet, catalogues and at trade counters to over one million customers, shipping more than 44,000 parcels a day. Our products sourced from 2,500 leading suppliers, include electronic components, electrical, automation and control and test and measurement equipment and engineering tools and consumables.

The business satisfies the small quantity needs of its customers who are typically electronics design engineers, machine and panel builders, maintenance engineers or buyers. A large number of high-quality goods are stocked, which are dispatched the same day that the order is received. The average customer order value is around GBP150 although the range of order values is wide. The Group's customers come from a wide range of industry sectors with diverse product demands.

OVERALL RESULTS

 
 
                         H1 2017     H1 2016   Change   Underlying 
                                                         Change(1) 
 Revenue               GBP706.3m   GBP626.5m    12.7%         2.1% 
                                                               0.3 
 Gross margin              43.6%       43.3%   0.3pts          pts 
 Headline operating 
  profit                GBP57.7m    GBP33.8m    70.7%        42.1% 
 Headline operating                               2.8          2.3 
  margin                    8.2%        5.4%      pts          pts 
 Operating profit                                 6.3          5.0 
  conversion %             18.8%       12.5%      pts          pts 
 
   1)     Underlying adjusted for currency; revenue also adjusted for trading days

Revenue

Group revenue increased by 12.7% on a reported basis to GBP706.3 million (2016: GBP626.5 million). Foreign exchange had a positive impact on revenues of GBP58.0 million during the half, while additional trading days boosted revenues by around GBP8 million. Underlying revenue growth was 2.1% during H1, with revenue growth improving from 0.9% during Q1 to 3.1% during Q2. All hubs except for Central Europe saw positive growth during the first half with the strongest growth being seen in Northern and Southern Europe. eCommerce revenues saw underlying revenue growth of 2.1% in H1 and represented 62% of total revenues. RS Pro, which represents 12.6% of revenues, outperformed overall Group growth with underlying revenue growth of 6.6%.

Gross Margin

Group gross margin at 43.6% was up 0.3 percentage points on both an underlying and a reported basis with management initiatives on price and increased discipline on discounting more than off-setting a 0.2 percentage points negative impact from transactional foreign exchange.

Looking forward, assuming constant pricing, recent sterling weakness means foreign exchange should move to be a positive feature for gross margins during the second half of this financial year. Sterling weakness will mean lower cost prices for our Southern Europe, Central Europe and Asia Pacific hubs when buying from the UK, which should more than offset the negative impact of higher cost prices for our UK business.

Operating costs

Total headline operating costs, which include hub costs and central costs, fell 2.1% on an underlying basis, but increased 5.3% on a reported basis to GBP250.0 million (H1 2016 : GBP237.5 million). Operating costs fell in underlying terms as we began to see the benefit of the cost-reduction initiatives undertaken as part of the PIP. Overall, we delivered savings of GBP13 million in the first half of 2017, which was ahead of our original target.

As part of our 'Simplify - Operate for Less' initiative, we will continue to make our operating model as lean and efficient as possible, so we can convert a higher percentage of gross profit into operating profit. As a result of the significant actions we have taken to address our cost base over the last year, our operating profit conversion ratio (headline operating profit as a percentage of gross profit) rose 6.3 percentage points in H1 2017 to 18.8% (H1 2016: 12.5%).

Headline operating profit

Headline operating profit for the year increased 70.7% to GBP57.7 million (H1 2016: GBP33.8 million) or 42.1% on an underlying basis. The operating margin improved 2.8 percentage points to 8.2% (H1 2016: 5.4%) or 2.3 percentage points on an underlying basis.

We are pleased by the significant improvement in profitability and momentum we have seen in the 12 months since the initiation of the PIP last November. We believe we are only just at the beginning of this journey to deliver a step change in the performance at Electrocomponents and we are extremely excited about the significant potential we see for further improvement and growth.

Segmental Results

The following section looks at the performance of each of our five hubs: Northern Europe, Central Europe, Southern Europe, North America and Asia Pacific (includes our emerging markets operations) as well as the central costs.

Northern Europe

 
                      H1 2017     H1 2016    Change    Underlying 
                                                         change 
                                                           (1) 
 Revenue             GBP199.3m   GBP187.1m    6.5%        3.5% 
 Operating profit    GBP42.0m    GBP31.2m     34.6%      28.4% 
 Operating margin      21.1%       16.7%     4.4 pts    3.8 pts 
 
   1)    Underlying adjusted for currency; revenue also adjusted for trading days

The Northern European hub consists of the UK, Ireland and Scandinavia and remains our most profitable hub. The UK is the main market for this hub and accounts for c. 90% of the revenue. Our UK business is the market leader, supported by 16 trade counters with a local stock profile, located in the UK's key industrial towns and cities.

Overall, Northern European revenue increased by 3.5% on an underlying basis and 6.5% on a reported basis to GBP199.3million (H1 2016: GBP187.1 million). Revenue growth remained strong across the period with 2.5% growth in Q1 despite some uncertainty in the UK ahead of the referendum vote in June and 4.4% growth in Q2. In H1, eCommerce revenue, which accounts for 69% of revenue, grew at 2.3% on an underlying basis. RS Pro sales, which account for 22% of revenue, grew at 4.7% on an underlying basis. Growth was strong across all three markets within the hub during the first half. In October the UK saw its eleventh consecutive month of growth with the new cross-functional hub leadership team driving a common go-to-market approach focused on identifying customer potential with increased sector and regional focus. As we move into Q4, we will begin to lap stronger trading comparatives in the UK, with the anniversary of our return to growth in the UK in December 2015 and the Raspberry Pi 3 launch in March 2016. However, we remain focused on continuing to take market share in the UK and driving incremental improvements to our customer and supplier experience. We are currently undertaking a major initiative to improve sales effectiveness across the Group, this work and the development of a consistent end-to-end sales process is currently being piloted in the UK.

Operating profit increased by 28.4% on an underlying basis, an increase of 34.6% on a reported basis to GBP42.0 million (H1 2016: GBP31.2 million). Operating margins rose 3.8 percentage points on an underlying basis and 4.4 percentage points on a reported basis to 21.1% (H1 2016: 16.7%) aided by an improvement in gross margins and tight cost control.

Southern Europe

 
                      H1 2017     H1 2016    Change   Underlying 
                                                       change(1) 
 Revenue             GBP136.3m   GBP114.3m   19.2%       3.8% 
 Operating profit    GBP12.1m     GBP9.5m    27.4%       0.8% 
                                              0.6 
 Operating margin      8.9%        8.3%        pts     (0.3)pts 
 
   1)    Underlying adjusted for currency; revenue also adjusted for trading days

The Southern European hub consists of France, Italy, Spain and Portugal. France is the main market for this hub and accounts for approximately two-thirds of the revenue.

Overall, Southern European revenue increased by 3.8% on an underlying basis, an increase of 19.2% on a reported basis to GBP136.3 million (H1 2016: GBP114.3 million), with all countries contributing to this strong performance. Growth was broadly consistent across the two quarters with Q1 up 3.9% and Q2 up 3.1%. France saw good growth driven by strong performances of RS Pro and the small and medium-sized customer segment. We saw a slowdown in the rate of growth with French corporate accounts, given particularly strong comparatives in the period. Spain also saw a good performance in spite of lower Raspberry Pi sales. Italy saw a more mixed performance, with some softness in corporate accounts. eCommerce revenue, which accounts for 73% of revenue, was up 3.2% on an underlying basis. RS Pro, which accounts for 15% of revenue in the hub, saw a very strong performance up 12.3% on an underlying basis.

Operating profits were up 0.8% on an underlying basis, an increase of 27.4% on a reported basis to GBP12.1 million (H1 2016: GBP9.5 million). Operating margins fell 0.3 percentage points on an underlying basis, but rose 0.6 percentage points at reported rates to 8.9% (H1 2016: 8.3%). Hub margins fell for two key reasons: first we saw a negative impact on gross margins from foreign exchange, with the six month lag on currency hedging meaning we did not see any benefit from recent sterling weakness during the first half; second we saw an increase in allocated costs due to increased investment in digital, RS Pro and supply chain with some additional one-off supply chain costs associated with the introduction of the Global Planning Tool.

Central Europe

 
                     H1 2017    H1 2016    Change   Underlying 
                                                     change(1) 
 Revenue             GBP95.3m   GBP82.6m   15.4%      (0.2)% 
 Operating profit    GBP4.3m    GBP3.5m    22.9%     (15.7)% 
 Operating margin      4.5%       4.2%     0.3pts    (0.9)pts 
 
   1)    Underlying adjusted for currency; revenue also adjusted for trading days

The Central European hub consists of Germany, Austria, Benelux, Switzerland and Eastern Europe. Germany is the main market for this hub and accounts for approximately two-thirds of the revenue.

Overall, Central European revenues reduced by 0.2% on an underlying basis, an increase of 15.4% on a reported basis to GBP95.3 million (H1 2016: GBP82.6 million). Revenue performance softened during the second quarter of the year with a decline of 1.1% in Q2 versus 0.5% growth in Q1. In terms of markets, Germany, Austria and Benelux all saw low single digit declines in revenues and this was only partially offset by a strong performance in the smaller markets of Switzerland and Eastern Europe. eCommerce, which accounts for 72% of revenue in the hub, saw a decline in revenues of 1.0% on an underlying basis. RS Pro, which accounts for 13% of revenue in the hub, grew 5.5% on an underlying basis. Operating profits were down 15.7% on an underlying basis, an increase of 22.9% on a reported basis to GBP4.3 million (H1 2016: GBP3.5 million). Operating margins declined 0.9 percentage points on an underlying basis, a 0.3 percentage points improvement on a reported basis to 4.5% (H1 2016: 4.2%) with hub cost reductions more than offset by the negative impact of foreign exchange movements upon gross margins and higher allocated costs due to investment in digital and some one-off supply chain costs associated with the introduction of the Global Planning Tool.

Overall, the performance in our Central European hub has been disappointing with financial metrics below our expectations. Given this unacceptable performance we are making changes to the hub leadership team. We are currently in the process of recruiting a new leader for our Central European hub. In the meantime we have an interim management team in place and have developed a new commercial plan for Central Europe, which is similar to the turnaround plan that has been so successful in Northern Europe. Our immediate focus is fourfold: first, establishing a strong leadership team in Central Europe; second, defining a clear go-to-market strategy - identifying and focusing on high potential accounts; third, increased focus on supplier relationships and RS Pro; and fourth, a continued focus on the digital experience and digital revenue growth in this important hub.

North America

 
                      H1 2017     H1 2016    Change   Underlying 
                                                       change(1) 
 Revenue             GBP181.8m   GBP159.9m   13.7%       1.4% 
 Operating profit    GBP21.0m    GBP17.9m    17.3%       4.5% 
 Operating margin      11.6%       11.2%     0.4pts     0.4pts 
 
   1)    Underlying adjusted for currency; revenue also adjusted for trading days

The North American hub consists of our Allied business and includes operations in the USA and Canada.

Overall, North American revenues increased by 1.4% on an underlying basis, an increase of 13.7% on a reported basis to GBP181.8 million (H1 2016: GBP159.9 million). Allied saw a strong recovery in trading in the second quarter of the year with Q2 revenues up 4.3% versus a decline in Q1 of 1.5%. We are currently searching for a new hub leader for our North American business. However, the interim management team at Allied has driven a successful marketing campaign to win back market share during the first half, with a particular focus on search engine marketing spend. As a result, we believe we have taken market share in the US market during the first half, particularly in the Automation and Control market. During the first half, eCommerce revenue, which accounts for 42% of hub revenue, grew 1.7% on an underlying basis and RS Pro continued to grow extremely strongly from a low base.

Operating profit was up 4.5% on an underlying basis, and up 17.3% on a reported basis to GBP21.0 million (H1 2016: GBP17.9 million). While competitive initiatives led to a reduction in the gross margin in the first half, this was more than offset by cost reduction initiatives. As a result, overall margins improved by 0.4 percentage points on both a reported and underlying basis to 11.6% (H1 2016: 11.2%).

Asia Pacific

 
                      H1 2017     H1 2016     Change    Underlying 
                                                         change(1) 
 Revenue             GBP93.6m     GBP82.6m     13.3%       0.5% 
 Operating loss      GBP(4.2)m   GBP(13.2)m    68.2%      69.6% 
 Operating margin     (4.5)%      (16.0)%     11.5pts    10.5pts

1 ) Underlying adjusted for currency; revenue also adjusted for trading days

The Asia Pacific hub consists of four similarly sized subregions: Australia/New Zealand, Greater China, Japan and South East Asia. We also have emerging markets operations in South Africa and Chile and use distributors in other territories.

Overall, Asia Pacific hub revenue increased 0.5% on an underlying basis, 13.3% growth on a reported basis to GBP93.6 million (H1 2016: GBP82.6 million). After a revenue decline of 1.6% in Q1 to June, the hub returned to revenue growth of 2.5% in the Q2 of the year, which was a pleasing performance given the significant restructuring we have carried out in Asia Pacific over the last year. eCommerce, which accounts for 51% of hub revenue, saw a strong performance with 4.4% growth on an underlying basis. RS Pro, which accounts for 13% of revenue, also significantly out-performed with 3.2% underlying revenue growth. We have made good progress during the first half at improving our service reliability in Asia Pacific, with a range reliability project across the region delivering some excellent results including an improvement in our 'On Time To Promise' (OTTP) service metric in China from 73% to 87%. All this work has helped lift our net promoter score in the Asia Pacific region by 11% year on year.

Both Australia/New Zealand and our emerging markets regions saw strong, double-digit growth across H1. The areas more impacted by the recent restructuring, i.e. Japan, China and Singapore (within SEA), saw declines in revenues during Q1. Encouragingly, however, we have seen a reduction in revenue declines in both SEA and China during Q2. This has partly been driven by improvements to our service and our go-to-market approach in these key markets and also strong growth in some of our smaller markets such as the Philippines and Korea, which together drove an improved regional performance during the second quarter of the year.

Operating losses reduced by 69.6% on an underlying basis, a 68.2% reduction on a reported basis to GBP4.2 million (H1 2016: GBP13.2 million). This strong performance was driven by the significant restructuring activity within the region to lower the cost base as well as a good performance on gross margin driven in part by management initiatives on price and mix. Furthermore, a currency tailwind from sterling weakness led to some immediate benefits on cost prices in certain Asian currencies.

Central Costs

 
                             H1 2017       H1 2016     Change    Underlying 
                                                                  change(1) 
 Headline central costs    GBP(17.5)m    GBP(15.1)m    (15.9)%    (12.9)% 
 
   1)     Headline costs are defined as before reorganisation costs, asset write-downs or disposals

Headline central costs are Group head office costs and include PLC, finance, human resources and legal costs. Central costs of GBP17.5 million (H1 2016: GBP15.1 million) increased by 12.9% on an underlying basis and 15.9% on a reported basis. The increase related to higher performance related pay, reflecting improved results. We expect to see a similar impact on central costs during the second half as a result of performance related pay.

Simplify - Operate for Less

During the first half we delivered net cost savings of GBP13 million, which was in excess of our original expectation of GBP10 million, as we continued to find ways to work more efficiently and held back on some reinvestment plans. As a result of this better than expected progress we now expect to deliver cost savings of GBP18 million in the full year to March 2017. Given this strong progress we are raising our 2018 annualised net savings target from GBP25 million to GBP30 million. Work continues to identify further ways we can work more efficiently and redeploy investment into areas where we can drive faster growth.

FINANCIAL REVIEW

Net finance costs

Net finance costs in the first half were GBP2.6 million, broadly in line with H1 2016 of GBP2.5 million.

Restructuring charges

The Group saw a labour-related restructuring charge of GBP1.8 million in the first half. This was partially offset by a profit on disposal of our Singapore warehouse of GBP1.2 million leading to a net restructuring charge of GBP0.6 million.

Profit before tax

Headline profit before tax was up 76% to GBP55.1 million (H1 2016: GBP31.3 million), a 45% increase on an underlying basis. Reported profit before tax was up 174% to GBP54.5 million (H1 2016: GBP19.9 million) aided by the significant reduction in net exceptional charges from GBP11.4 million in H1 2016 to GBP0.6 million in H1 2017.

Earnings per share

Reported earnings per share of 9.0p was up 190% (H1 2016: 3.1p). Headline earnings per share of 9.1p was up 75.0% or 56.9% on an underlying basis.

The weighted average number of shares was 440.3 million (H1 2016: 439.3million).

Return on Capital Employed (ROCE)

Net assets at the end of the first half were GBP326.9 million (H1 2016: GBP360.4 million). ROCE calculated using period end net assets and net debt balances was 22.5% (H1 2016: 14.6%).

Cash flow

 
 GBP million                                       H1       H1 
                                                 2017     2016 
 Headline Operating Profit                       57.7     33.8 
 Depreciation and amortisation                   14.9     14.1 
 Loss on assets and other non-cash movements      2.5      1.6 
 Movement in working capital                      7.0   (11.1) 
---------------------------------------------  ------  ------- 
 Adjusted cash generated from operations         82.1     38.4 
 Net interest paid                              (2.6)    (2.5) 
 Income taxes paid                              (9.2)    (9.8) 
---------------------------------------------  ------  ------- 
 Adjusted net cash inflow from operating 
  activities                                     70.3     26.1 
 Net capital expenditure                        (8.4)   (14.3) 
---------------------------------------------  ------  ------- 
 Headline free cash flow                         61.9     11.8 
 Net outflow related to restructuring           (3.0)    (0.5) 
---------------------------------------------  ------  ------- 
 Free cash flow post restructuring               58.9     11.3 
---------------------------------------------  ------  -------

Headline operating profit for the first half was GBP57.7 million (H1 2016: GBP33.8 million). Depreciation was GBP14.9 million (H1 2016: GBP14.1 million). Working capital inflow in H1 2017 was GBP7.0 million (H1 2016: outflow of GBP11.1 million). The working capital inflow was driven by our ongoing efforts to reduce levels of inventory and improve debtor and creditor days. Working capital as a percentage of revenue improved 1.5 percentage points to 22.4% (H1 2016: 23.9%). Stock turn rose to 2.8x (H1 2016: 2.5x).

Net interest paid of GBP2.6 million (H1 2016: GBP2.5 million) was in respect of interest on borrowings, whilst income tax paid amounted to GBP9.2 million (H1 2016: GBP9.8 million).

Net capital expenditure (excluding the impact of the sale of the Singapore warehouse) in the first half was GBP8.4 million (H1 2016: GBP14.3 million). We reviewed a number of capital expenditure projects in the first half as we drove a higher level of financial discipline and project prioritisation into the capital expenditure planning process. As a result, capital expenditure fell to 0.6x depreciation during the first half (H1 2016: 1.0x). Given these changes, we now anticipate capital expenditure will run at around 0.7x depreciation in the full year, lower than our previous guidance of 1.0x.

Headline free cash flow for the first half was GBP61.9 million (H1 2016: GBP11.8 million). Operating cash flow conversion, which is defined as headline free cash flow pre-taxation and interest as a percentage of operating profits and is one of our seven KPIs, improved to 127.7% (H1 2016: 71.3%).

There was a net cash outflow related to the restructuring activities of GBP3.0 million during the first half, which largely relates to labour restructuring charges only partially offset by the proceeds from the sale of our Singapore warehouse of GBP6.3m.

Net debt

At 30 September 2016 net debt was GBP140.9 million. This was GBP24.2 million lower than at 31 March 2016. This was principally due to first-half headline free cash flow of GBP61.9 million being more than the final dividend of GBP29.7 million for the 2016 financial year paid during the period.

The Group's c. GBP186 million syndicated multi-currency bank facility maturing in August 2019 was extended with six banks from 6 October 2016 to August 2021. This facility, together with the Group's $185 million of US Private Placement (PP) notes, provides the majority of the Group's committed debt facilities and loans of GBP329.8million, of which GBP158.1 million was undrawn as at 30 September 2016. The PP notes are split, $100 million maturing in June 2020 and $85 million maturing in June 2017, and cross currency interest rate swaps have swapped $45 million of the PP notes from fixed Dollar to floating Sterling, $40 million from fixed Dollar to floating Euro and $20 million from fixed Dollar to fixed Sterling, giving the Group an appropriate spread of financing maturities and currencies.

The Group's financial metrics remain strong with EBITA interest cover of 23.7x and Net Debt to EBITDA of 1.0x (both measures are based upon twelve months ended 30 September 2016 financials), leaving significant headroom to the Group's banking covenants. Under the new extended bank facility the Net Debt to EBITDA ratio has been amended so that Net Debt is now computed using average rather than closing exchange rates, i.e. the same rates as for the EBITDA. Under this basis Net Debt to EBITDA was 1.0x.

Pension

The Group has material-defined benefit schemes both in the UK and Europe. The UK scheme is by far the largest. All these schemes are closed to new entrants and in Germany and Ireland the pension schemes are closed to accrual for future service.

Under IAS19, the deficit of the UK defined benefit scheme at 30 September 2016 was GBP116.6 million (GBP30.4 million at 31 March 2016). The combined gross deficit of the Group's defined benefit and retirement indemnity schemes at 30 September 2016 was GBP133.5 million (GBP43.3 million at 31 March 2016).

The increase in the UK deficit over the six months ending 30 September 2016 was principally caused by an increase in liabilities due to discount rates falling by 1.2% percentage points from 3.6% to 2.4%.

The triennial valuation of the UK Scheme at 31 March 2016 showed a deficit of GBP60.8 million on a statutory technical provisions basis. A recovery plan is in place, which has been agreed with the Trustees of the UK Scheme and our deficit contributions will continue with the aim that the Scheme is fully funded on a technical provisions basis by 2023.

Dividend

The Board recognises the importance of dividends to shareholders and we remain committed to improving dividend cover over time by driving improved results and stronger cash flow. We propose to maintain the interim dividend of 5.0p per share. This will be paid on 11 January 2017 to shareholders on the register on 2 December 2016.

Foreign exchange risk

The Group does not hedge translation exposure on the income statements of overseas subsidiaries. Based on the 2016 mix of non-pound sterling denominated revenue and adjusted operating profit, a one cent movement in euro would impact profits by GBP0.8 million and a one cent movement in US dollars would impact profits by GBP0.3 million.

The Group is also exposed to foreign currency transactional risk because most operating companies have some level of payables in currencies other than their functional currency. Some operating companies also have receivables in currencies other than their functional currency. Group Treasury maintains three to six month hedging against freely tradable currencies to smooth the impact of fluctuations in currency. The Group's largest exposures relate to euros and US dollars.

Risks and uncertainties

The Group's risk management process identifies, evaluates and manages the Group's principal risks and uncertainties. These are reviewed by both the Group's Risk Committee, comprising the Group's senior managers, and the Board which regularly discusses the principal risks and receives risk reports covering risk mitigations and controls.

The Group has a defined risk appetite, which has been adopted by the Board, across three risk categories: strategic, operating and regulatory/compliance risk categories. These risk appetites have both quantitative and qualitative criteria.

The principal risks and mitigations in the 2016 Annual Report continue to be valid. However the risk highlighted at the year-end (31 March 2016) regarding 'uncertainty around the UK referendum on continued membership of the European Union (EU)' has developed further following the decision on 23 June 2016 to leave the EU. The risk is now more defined around the management of the business and trading consequences of the UK's decision to leave the EU.

While the UK government process is still in its early stages the Group has identified areas that may be affected; these include the global supply chain infrastructure which supports the Group's business model. Areas being reviewed include the transport of products between the UK and EU; and group purchasing arrangements both within and outside the EU.

Responsibility statement of the directors in respect of the half-year financial report

The directors confirm that these Condensed Interim Financial Statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by Disclosure and Transparency Rules (DTR) 4.2.7 and DTR 4.2.8, namely:

-- An indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

   --      Material related party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

The directors of Electrocomponents plc are listed in the Electrocomponents Annual Report and Accounts for the year ended 31 March 2016. A list of current directors is maintained on the Electrocomponents plc website: www.electrocomponents.com.

Lindsley Ruth, Chief Executive Officer David Egan, Group Finance Director

17 November 2016

SAFE HARBOUR

This financial report contains certain statements, statistics and projections that are or may be forward-looking. The accuracy and completeness of all such statements, including, without limitation, statements regarding the future financial position, strategy, projected costs, plans and objectives for the management of future operations of Electrocomponents plc and its subsidiaries is not warranted or guaranteed. These statements typically contain words such as "intends", "expects", "anticipates", "estimates" and words of similar import. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Although Electrocomponents plc believes that the expectations reflected in such statements are reasonable, no assurance can be given that such expectations will prove to be correct. There are a number of factors, which may be beyond the control of Electrocomponents plc, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. Other than as required by applicable law or the applicable rules of any exchange on which our securities may be listed, Electrocomponents plc has no intention or obligation to update forward-looking statements contained herein.

Condensed Consolidated Income Statement

 
 
                                                Unaudited      Unaudited     Audited 
                                                 6 months       6 months     Year to 
                                     Note    to 30.9.2016   to 30.9.2015   31.3.2016 
                                                     GBPm           GBPm        GBPm 
-----------------------------------  ----  --------------  -------------  ---------- 
Revenue                               1             706.3          626.5     1,291.1 
Cost of sales                                     (398.6)        (355.2)     (729.6) 
-----------------------------------  ----  --------------  -------------  ---------- 
Gross profit                                        307.7          271.3       561.5 
Distribution and marketing 
 expenses                                         (232.5)        (222.4)     (449.5) 
Administrative expenses                            (18.1)         (26.5)      (71.9) 
Operating profit                                     57.1           22.4        40.1 
 
Financial income                                      0.5            0.8         2.3 
 
Financial expense                                   (3.1)          (3.3)       (7.5) 
 
Profit before tax                     1              54.5           19.9        34.9 
 
Income tax expense                    3            (14.7)          (6.2)      (13.0) 
-----------------------------------  ----  --------------  -------------  ---------- 
Profit for the period attributable 
 to the equity shareholders 
 of the parent company                               39.8           13.7        21.9 
===================================  ====  ==============  =============  ========== 
 
Earnings per share - Basic            4              9.0p           3.1p        5.0p 
Earnings per share - Diluted          4              9.0p           3.1p        5.0p 
 
Dividends 
Amounts recognised in the 
 period: 
-----------------------------------  ----  --------------  -------------  ---------- 
Final dividend for the year

 ended 31 March                       5             6.75p          6.75p       6.75p 
Interim dividend for the year 
 ended 31 March 2016                  5                 -              -        5.0p 
-----------------------------------  ----  --------------  -------------  ----------

An interim dividend of 5.0p per share has been proposed since the period end.

 
                                         Unaudited      Unaudited     Audited 
                                          6 months       6 months     Year to 
                               Note   to 30.9.2016   to 30.9.2015   31.3.2016 
                                              GBPm           GBPm        GBPm 
Headline operating profit 
Operating profit                              57.1           22.4        40.1 
 
Intangible fixed asset write 
 down                           2                -           11.4        11.2 
Net reorganisation costs        2              0.6              -        30.7 
-----------------------------  ----  -------------  -------------  ---------- 
                                              57.7           33.8        82.0 
=============================  ====  =============  =============  ========== 
 
 
Headline profit before tax 
Profit before tax               54.5  19.9  34.9 
 
Intangible fixed asset write 
 down                          2   -  11.4  11.2 
 
  Net reorganisation costs     2 0.6     -  30.7 
-----------------------------   ----  ----  ---- 
                                55.1  31.3  76.8 
=============================   ====  ====  ====