Review of Operations

Marketing and Distribution Division (MDD)

MDD Comprises: Newark, Farnell Europe and Asia Pacific, MCM and CPC

Overall, sales for the year rose 1.6%. We have continued to execute our strategy throughout the year, repositioning the organisation for growth throughout the industry cycle, and focusing on the faster growing areas of the market – EDE, the web and internationalisation – while maintaining our focus on profitable MRO. Sales growth in the first half of the year was 6.2%, in line with our strategic target, while the second half of the year was impacted by the unprecedented global economic slowdown and saw sales decline by 3.0%. Despite the current economic challenges, the strategy we set two years ago is still aligned with the available opportunities for growth. EDE, the web, China, India and most of Eastern Europe are expected to continue growing as the global economy declines during this down cycle, and we continue rigorously to pursue growth in these target markets. We have made, and despite the challenges of the global economy, will continue to make, strategic investments in the business. During the year we incurred incremental revenue investment of over £8.0 million to meet the technical needs of our EDE customer segment, as well as investing to ensure the robustness of our global product offering. In addition, to ensure that we are appropriately structured for the future, in the fourth quarter of the year we reduced our global employee base by around 300, for a total Group wide one-off cost of £3.4 million (of which £2.9 million related to the MDD Division) and a total annualised benefit of £12.0 million. We will continue to evaluate our operations to ensure that back office systems and sales and marketing functions are appropriately aligned to our customer shift in preferred sales channels.

Underlying operating profit was £85.7 million (2008: £84.4 million) with underlying operating margin of 11.8% (2008: 12.6%). There was a beneficial impact on operating profit in the financial year from the translation of overseas results of £7.6 million, reflecting the relative strength of the US dollar (£4.6 million) and the Euro (£3.0 million).

Web sales grew 23.5% in the year and eCommerce channels now account for 34.8% of total MDD sales and over 50% in Farnell Europe. Continued enhancements to speed, search and functionality, including several new tools to make the web a richer channel, has seen it become our primary channel for new customer acquisition. In addition, the development of tools aimed at existing customers, including multi-channel order history, allowing customers to review their entire purchasing history online, has also resulted in a significant proportion of customers switching to the web. Our websites are best in class and are regularly tested against standards set by web businesses; Premier Farnell regularly has faster search times than well-known global web-centric brands. Our websites contain up to three gigabytes of product, legislative and environmental information for each of our over 400,000 products. This information is extremely valuable to EDE customers as they begin their designs and we have a dedicated team of professionals who pull together and distil this information.

The web migration has permitted us to effect permanent changes to our cost base. This, together with the benefit of integrated programmes for cost reduction and operational efficiency, will enable us to rebase our net operating expenses as a percentage of sales. Accordingly, we have raised our long-term target for return on sales for the Group as a whole from 10% to 12%.

The multi-channel approach for the MDD Division means that we will still produce informative catalogues. These catalogues have evolved in line with our strategic transformation and now have a greater emphasis on EDE products and solutions than ever before. The businesses have also used other marketing tools to attract new customers; the year saw the launch of a journal targeted at EDE customers, and the hosting of a number of sponsored events which focused on specific product and market segments. One such even focused on the LED market, which is estimated to be growing at circa 20% annually, while another was focused on energy efficiency, which continues to drive a significant amount of our customers’ redesign activities.

Product and supplier portfolio

We continue to evaluate our franchise portfolio to ensure that we have the right products and suppliers on our line card. EDE customers require esoteric product for their new designs, while profitable MRO customers require specific products for the maintenance and repair work they conduct. Striking the right balance is important and during the year we further strengthened our offering by adding more than 40 new supplier partnerships to support our high service proposition. The complete list follows:

Suppliers looking to reach our growing EDE customer base continue to partner with us in exclusive programmes. Our high service proposition is as important to suppliers as it is to customers; suppliers value the high service model because it enables the faster introduction of new products to EDE customers globally. When these new products are launched to the market quickly and effectively, as Premier Farnell does, there is a better chance that these time sensitive designs will incorporate the new technology, thereby ensuring that the component will be required for the ongoing large scale production of the product.

Throughout the year we added 54,000 EDE products to our portfolio; these are esoteric products in high demand by our EDE customers. The Division’s portfolio now includes the majority of the world’s leading electronic component brands and a strong base of emerging technology suppliers, providing design engineers across the globe with increased access to an impressive depth and breadth of product.

Statistics from the Semiconductor Industry Association (SIA) showed a year on year decline in billings in the Americas for the equivalent period of 11.6%. In MDD Americas sales grew 0.3%, with the slow down experienced in the fourth quarter offsetting the growth experienced in the first three quarters. The first half of the year saw our strategy take hold and effect real transformation in the Americas, while the second half saw the business continue to drive the strategy despite the slowing market.

Total operating margin for the year was 9.1% (2008: 9.5%). Underlying operating margin was 9.3% (2008: 9.5%).

Web sales in MDD Americas grew by 25.9% in the year. Total eCommerce sales represented 20.3% of total sales in the year as our web channel continues to attract new customers to our high service proposition and draw customers from other channels to this rich source of information. During the year the business launched several new and innovative self-service eTools to make our web proposition even richer, these include Multi-Channel Order History, which makes a customers complete history available regardless of channel, iBuy, Premier Farnell’s own eProcurement solution and eQuotes which is an innovative tool that makes turning a quote into an order, seamless.

Newark

Newark is a market-leading multi-channel distributor of electronic components, eProcurement solutions and stockroom management services in the Americas. Its customers include electronic design engineers and maintenance repair technicians in the US, Canada, Mexico and Brazil. It comprises 93% of MDD sales in the Americas. Newark’s sales grew 0.6% in the year as the business continued to pursue its strategic transformation in increasingly challenging markets.

During the year Newark’s focus on the EDE segment of its business included the introduction of more than 27,000 new EDE products to its portfolio and launching several innovative marketing campaigns to attract new EDE customers to its offering. Targeted marketing activities, together with improvements to the web front end and the introduction of several new web tools, resulted in sales to the small and emerging customer segment growing by 23.7% year on year.

New web tools included our multi-channel order history, which gives customers access to their history with Newark regardless of channel, and eQuotes, an innovative new online quoting tool that can easily be converted into a purchase order. These tools combined with improvements to our speed and search capabilities have seen web sales increase by 29.2%; sales via eCommerce now account for 20.3% of total sales for the Division.

The web has not only improved functionality for our customers, but has also provided Newark with improved operating efficiencies. One touch order processing allows a web order to be processed automatically; the first time it is seen by one of our employees is when the order is sent to our distribution facility for picking, packing and dispatch. The improved efficiency from this type of processing has allowed us to enhance our back office systems to ensure that they appropriately support our web offering. This permanent enhancement in our back office systems has improved our flexibility and cost structure, making the web the most cost effective channel.

Newark continued to expand its multi-channel offering across North America and subsequent to year end has announced a restructuring of its branch network, resulting in the closure of nine branches. A number of employees from these branches will continue to form part of a local team that will continue supporting customers and maintaining the business’ strong presence in these markets. We have invested significantly in our contact centre to ensure that we are able to continue the important one-to-one customer relationships already established, and will continue investing in our web environment to further attract customers to this content rich channel.

Newark Brazil recorded sales growth of 18.8% in the year with full year sales of £6.9 million.

MCM

MCM distributes electronics and related equipment to service and repair professionals and technical hobbyists throughout the US and comprises 7% of MDD Americas sales. During the year MCM sales were down 3.2% on the prior year, as US consumer spending softened. Despite these challenges, MCM attracted more than 30,000 new customers via the web as a result of improvements to search engine marketing and optimisation. Web sales improved 7.2% throughout the year and eCommerce now accounts for 46.2% of total MCM sales. In addition to improved web marketing, the business continues to benefit from its traditional marketing campaigns and innovative customer re-activation programmes.

Sales increased by 2.8% in the year, as the strength demonstrated by the business in the first half of the year offset the slowing experienced in the second half. Mainland Europe continues to be the region in the most advanced stage of our strategic transformation and sales growth has remained relatively strong. In the UK, we took actions early in the year to address some areas where it was felt there were failings, and throughout the year Farnell UK outperformed the market and embraced these changes.

In Asia, the benefits from the strategic initiatives, in particular the emphasis on growing China and India, helped deliver strong growth in all four quarters. The underlying operating margin of 14.2% reflected the impact of the sales decline in the fourth quarter and the strategic investments we are making for the future.

Progress has continued against the strategic initiatives. Web sales continue to grow, up 22.8% in the year, and eCommerce sales now account for 46.4% of total sales. Five new local language websites were launched during the year, in support of growing demand across Asia and Eastern Europe. As predicted when we launched our strategy, EDE sales grew faster at any time in the cycle than MRO, and we continue to see an outperformance of EDE sales. In order to support this faster growing segment, MDD Europe and Asia Pacific added more than 150,000 new EDE products to its portfolio and signed exclusive distributorships with 40 new EDE focused suppliers, ensuring exclusive access to new high demand, specialised EDE products.

Internationalisation also continued at pace and sales from developing markets accounted for 17.6% of total sales, approaching the 20% target.

Mainland Europe

Strategic progress is most advanced in mainland Europe and our continued focus on EDE, the web and faster growing international markets all combined to deliver sales growth of 4.5% during the year, helping to offset the effects of the economic slowdown. Continued innovation has supported web sales growth in the year and customers are increasingly drawn to this content rich channel. iBuy, the new eProcurement solution launched in the second quarter, has seen strong take up with over 1,000 active customers. Customer segmentation work has ensured that the business has the products and solutions to meet the needs of EDE customers in high growth segments. Despite the broad based slowing, certain segments of the market demonstrated strong growth throughout the year and this business worked with customers and suppliers to target this growth through effective and efficient means. The addition of new EDE products improves the breadth and depth of the portfolio. Sales from the fast growing East European market grew 68.4%, more than 50% growth in each quarter. A local approach to business in these regions, combined with the strength of 11 local language websites, the broad product offering and guaranteed next day delivery has resulted in the acquisition of customers in the region every day. For more information refer to the case study Expanding customer reach in Eastern Europe.

In December the business acquired part of the trading rights and assets of the Microdis Holdings Group, a distributor in Poland, Hungary and the Czech Republic. Microdis has a long history in Eastern Europe and was an authorised distributor for Farnell. This acquisition will extend the Farnell footprint even further into this high growth region.

UK

The Division’s UK sales, comprising sales from Farnell UK and CPC, increased 0.8% in the year.

Farnell: Farnell markets and distributes electronic components, test and measurement equipment and MRO products to design engineers, purchasing professionals and maintenance technicians, with businesses in the UK, mainland Europe and Asia Pacific.

Farnell UK sales declined by 0.7% in the year, reflecting the challenging market conditions, yet still significantly outperforming the market; the Association of Franchised Distributors of Electronic Components (AFDEC) showed a decline in the UK of 4.1%. Corrective actions taken early in the year to address some performance related challenges saw Farnell UK deliver three straight quarters of sales growth, while the fourth quarter was significantly challenged by slowing sales in many areas of the market. Despite these challenges, progress against the strategic initiatives continues and as a result the business was in a position to reduce costs by way of non-essential head count reductions in the fourth quarter. Further rationalisation is expected as we align the business with the needs of our EDE customers, the web and new and developing international markets.

CPC: CPC distributes electrical and electronic equipment and accessories.

Sales for the year were broadly flat, as the business was able to offset the softening market through innovative marketing campaigns and targeted sales growth in some of the higher growth segments of its market like energy efficiency and own brand. Own brand sales continued to perform strongly and represented 24% of total sales in the year as customers looked for alternative products to meet their needs. CPC’s web sales increased 16.7% and record numbers of unique visitors logged on, driven by improvements to the web front end and new ways of marketing the web. Despite the challenges in the market and the increasing pressure on prices, CPC effectively controlled its margins.

Asia Pacific

Sales in Asia Pacific were up 6.7% in the year, reflecting the strong growth of sales in Asia offsetting the challenging year faced by Australia and New Zealand.

Our strategy predicted that China and India would continue to see strong growth, even if Western economies entered a downturn and the results delivered throughout the year have demonstrated the continued appropriateness of this strategy. Although China and India are experiencing a slow-down, they continue to grow and continue to demonstrate significant opportunities for further expansion.

In China, EDE customers are drawn to the high service proposition that enables us to deliver next day to more than 110 cities across the country. The web is the preferred channel for these customers as they spend significant amounts of time online, researching legislative and environmental requirements, viewing products and product specifications, talking to one another or our technical experts and placing orders. Sales in China increased 39.4% on the prior year as customer acquisition activities, the broad product offering and a targeted approach to higher growth segments of the market continued to deliver growth, despite the somewhat slower economy. For more information refer to the case study Supporting China’s rapid growth.

Farnell India, which started trading at the end of January 2008 completed its first year as part of the Group. The business was quick to adopt our high service proposition and saw significant sequential sales growth in all four quarters. In order to support local EDE customers, Farnell India expanded its network to nine branches, launched a local websites with rupee pricing, introduced a catalogue to the market and developed cyber cafes that enable customers who do not have access to the web a place to go and use our website. Farnell India offers more than four million products available for delivery from the distribution centres located globally. For more information refer to the case study India’s high service, high growth opportunities.

Markets continued to be challenging in Australia and New Zealand (ANZ). This business went through a rigorous reshaping in the third quarter in order to address some of the challenges it faced. A team was dispatched to address people, product and pricing issues faced by the ANZ business. Each of these issues has now been corrected and the business is now strategically aligned with opportunities in the local market. Sales for the year were down 6.1%.

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Industrial Products Division

The Industrial Products Division (IPD) comprised three businesses during the year, Akron Brass and TPC Wire & Cable, both supplying high performance products to specialist industrial markets, and Cadillac Electric which has now been closed.

Our IPD Division predominantly supplies products for North American industrial markets. Sales for Akron Brass and TPC Wire & Cable combined, which together represent 93% of the IPD business, declined 2.5% in the year as both these businesses continued to diversify successfully in to international and new industrial markets to offset the decline in their traditional North American markets which have been significantly impacted by the economic slowdown. Cadillac Electric sales, which represent 7% of total IPD sales and 0.6% of Group sales, declined to £4.8 million, reflecting
the planned wind down of specific trading activity.

Akron Brass

Akron Brass is a market leader in the manufacture and sale of high performance fire-fighting equipment for fire trucks manufacturers, public fire services and industrial facilities. Its products are designed to improve the safety and efficiency of personnel and equipment engaged in the suppression of fire and also includes lighting and electrical control solutions. It sells through its own field sales force and through distributors to customers around the world. It has a high share of the North American market and seeks to grow by broadening its product range and reach new geographic and industrial markets.

Sales at Akron Brass were down 0.9%, reflecting the success of measures taken to diversify and expand into international and new industrial markets. International sales now represent 21.1% of the business’s total sales. Akron Brass also saw strong growth from new industrial segments, including school buses, petrochemical and military applications.

Tight cost controls and initiatives to ensure that the business is the right shape for its current market conditions have allowed the business to maintain its margins again this year.

TPC Wire & Cable

TPC is a distributor of high performance electrical wire, cable and connectors designed for heavy duty or harsh industrial environments in the US, Canada and Mexico.

TPC sales declined 8.0% during the year, as the business’s traditional automotive markets were severely impacted by the slowing global economy. Diversification into new industrial markets, including crane, utilities, alternative energy and petrochemical, continues. Sales into non-automotive markets now account for 80% of sales and the business will continue to develop new products for the higher growth segments that it supports.

Programmes have been put in place to ensure that TPC is right-sized for current business levels. Reduced overheads and tight control on all other costs have resulted in stable margin, despite the slowing sales environment.

Cadillac Electric

Sales in Cadillac were down 30.9% in the year at £4.8 million, reflecting the significant challenges faced by the North American automotive market and the planned wind down of specific trading activities. Towards the end of the year the decision was taken to transfer the “Hoffman” range of products to the TPC Wire & Cable business and to wind down the remaining part of this business. This will be completed by the end of the first quarter of 2010 at no significant cost to the Group.