RS Group plc – Annual report – 31 March 2024
Industry: distribution
Viability statement
Assessment of prospects
Our business model and strategy, as described on page 13, is structured so that the Group is a digitally-enabled global distributor of product and service solutions, providing small volumes of our suppliers’ products to satisfy our industrial customers’ MRO demands. We supply a very broad spread of customers both in terms of industry sector and geography. The Group is not reliant on one particular group of customers or suppliers, with its largest customer accounting for under one percent of revenue and its largest supplier less than five percent of revenue. Our business model is differentiated by: our global network of distribution sites; our customer-centric team; our strong supplier relationships; our broad and deep product offering and service solutions capabilities; and our strong digital presence. The Group has high inventory availability with products sourced from a large number of suppliers and provides customers with a reliable and fast service.
The Group’s results and financial position are reviewed monthly by both our ExCo and the Board. Every day the ExCo receives an analysis of the previous day’s revenue and gross margin. The Board receives and reviews regularly the monthly management accounts, including cash flows, and also receives regular performance and forecast updates from the CFO and CEO.
We update our detailed rolling 18-month forecast of the Group’s income statement, balance sheet and cash flows frequently which are regularly reviewed, and the assumptions approved, by the Board.
The Group’s long-term prospects are assessed primarily through our strategic and financial planning process. This includes the preparation of a five-year strategic plan and an annual budget setting process involving both Group and regional management which are updated annually and reviewed and approved by the Board. The ExCo receives and reviews progress against the strategic plan objectives regularly. The Board also receives updates and, if appropriate, the strategic plan is updated depending on progress and performance.
The Board also considers the long-term prospects of the Group as part of its regular monitoring and review of risk management and internal control system, as described on pages 32 and 80 to 83.
Our regular cash flow forecasts enable us to track our net debt position and to take any necessary actions on a timely basis. Our capital position is supported by regular reviews of the Group’s funding facilities and banking covenants’ headroom, through the Group’s Treasury Committee. In April 2023 we took out a new €150 million three-year term loan to partly fund our acquisition of Distrelec and in October 2023 our request to take up one of the one-year term extensions to the £400 million SLL facility was approved by lenders and so now matures in October 2028. Only £155 million of this facility was drawn down at 31 March 2024.
As described throughout this Annual Report and Accounts, the Group’s performance was impacted by the challenging macroeconomic environment over the past year and the unwinding of our post-pandemic trading benefit. As a result, like-for-like revenue declined by 8% and adjusted free cash flow fell by 43% to £151 million leading to net debt of £418 million (including lease liabilities of £74 million) at 31 March 2024. We also paid dividends during the year of £104 million (2022/23: £89 million) and the acquisition we completed during the year increased net debt by £333 million. We have ended the year with a strong balance sheet.
Details of our sources of finance are outlined in Note 23 on page 163, with the earliest facilities maturing being the three-year term loan and two tranches of our private placement loan notes in 2026/27.
The Group’s debt covenants are EBITA to interest to be greater than 3:1 and net debt to adjusted EBITDA to be less than 3.25:1. At 31 March 2024 EBITA to interest was 10.5x (2022/23: 34.2x) and net debt to adjusted EBITDA was 1.1x (2022/23: 0.2x) (see Note 3 on pages 137 and 138 for reconciliations) and under our strategic plan these are also comfortably met.
Viability assessment period
In its assessment of the Group’s viability, the Board has reviewed the assessment period and has determined that a three-year period to 31 March 2027 continues to be most appropriate. The robustness of the strategic plan is significantly higher in the first three years with the final two years being a high-level extrapolation. The Group has few contracts with either customers or suppliers extending beyond three years and, in the main, contracts are for one year or less.
The business operates with a minimal forward order book, generally taking orders and shipping them on the same day. In addition, as more business becomes digital and we become more agile, speed of change increases and so visibility is relatively short term. Of the Group’s long-term obligations, the UK pension scheme is the largest and its triennial funding valuation forms the basis of our agreeing its funding with its trustee. Our share-based payment schemes are also mainly for three years.
Assessment of viability
Each of the Group’s principal risks and uncertainties on pages 34 to 37 has a potential impact on the Group’s viability and so the Board considered various scenarios and examined a number of factors that could impact each in the future. It decided which scenarios would have the most impact on the viability of the Group and determined an appropriately severe but plausible stress test for each of these scenarios.
The strategic plan approved at the January 2024 Board meeting, adjusted to include the estimated effect of our acquisition of Trident in April 2024, is considered to reflect the Board’s currently best estimate of the future prospects of the Group. Therefore, in order to assess the viability of the Group, the scenarios and stress tests were modelled by overlaying them onto the adjusted strategic plan to quantify the potential impact of one or more of them crystallising over the assessment period.
The scenarios and related stress tests modelled and how they link to the principal risks and uncertainties were:
In performing the above tests it was assumed that no major reorganisations or significant working capital initiatives occur in mitigation, capital expenditure is not lower than that in the strategic plan, dividends continue to be paid and there are no changes in or extensions to debt financing. As a result, all the above tests model the new principal risk and uncertainty ‘Access to debt and capital markets’.
In none of the stress tests were the Group’s covenants breached nor were the Group’s debt facilities used up. The results of the stress tests to the left showed the Group would be able to withstand the impact of these scenarios occurring.
Reverse stress tests were also undertaken to assess the circumstances that would threaten the Group’s current financing arrangements. These included significant declines in revenue, significant declines in revenue and gross margin and a major deterioration in cash collection and would have to result in adjusted operating profit margin falling to under 5% in at least one of the following three years. Also, a reverse stress test of an acquisition of a significantly loss-making business was undertaken and would have to cost over £300 million to use up our debt facilities. All these reverse stress tests assumed that no major reorganisations or significant working capital initiatives occur in mitigation, capital expenditure is unchanged from that in the strategic plan, dividends continue to be paid and there are no changes in or extensions to debt financing. The Board considers the risk of these circumstances occurring to be remote.
The above scenarios are hypothetical and extremely severe for the purpose of creating outcomes that have the ability to threaten the viability of the Group; however, multiple control measures are in place to prevent and mitigate any such occurrences from taking place. If any of these scenarios actually happened, various options are available to the Group to maintain liquidity so as to continue in operation.
Confirmation of viability
Based on the assessment outlined above, the Board has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three years to 31 March 2027.
Going concern
The going concern period is defined as a period of at least 12 months from 22 May 2024.
Based on the assessment outline above and the output of our detailed rolling 18-month forecasts, the Board believes that it is appropriate to continue to adopt the going concern basis in preparing the Group’s accounts.
Accounts examples 