Review of Operations

Marketing and Distribution Division (MDD)

MDD comprises: Newark, Farnell, MCM and CPC.

Continuing businesses

*Restated to exclude discontinued operations.

Overall, sales rose by 4.5% in the year. Despite the more challenging market conditions, sales growth accelerated in the second half of the year, particularly in the Americas, and grew faster than the market as the strategy drove more profitable growth. Operating profit was £84.4 million with operating margin of 12.6% (2007: 12.2%) reflecting the continuing tight cost control even after the ongoing investment in the Group’s strategy. There was an adverse impact on operating profit from the translation of overseas results of £1.6 million reflecting the relative weakness of the US dollar (£2.3 million) partly offset by the relative strength of the Euro (£0.7 million). Operational gearing was 16.1%.

Web sales grew 32.9% in the year. Momentum from the implementation of the new web front end across the Americas at the end of the prior year and the successful roll-out to Europe and Asia Pacific in April 2007 continued to build, supported by continuing enhancements to the speed, simplicity and search capabilities of the global web platform. The new website regularly reaches the top of the non-sponsored search engine listings, for electronic component distributors and is a key element of the Division’s multi-channel offering, giving electronic design engineers the rapid access to quality data and product information they require. Investment in eCommerce tools during the second half of the year, resulting in quality and timely data, has enabled the businesses to increase the pace and accuracy of the Division’s eCommerce development. By the fourth quarter, eCommerce sales accounted for 29.4% of sales across the Division.

The multi-channel approach for the MDD Division has continued to support the offering with product selection in the new catalogues issued during the year reflecting greater focus on design centric products. A number of global technology campaigns were launched in the year, using the power of the web, including Global ED World, a microsite incorporating new tools and information for design engineers.

Product and supplier portfolio

A number of significant franchise agreements and territorial expansions were signed during the year and the Group now has over 60 franchise additions to underpin its strategy with a world class line card of suppliers to enhance its proposition to the EDE segment.

New supplier additions during the year included:

Suppliers looking to reach our growing EDE customer base continue to partner with us in exclusive programmes as we forge close relationships, supported by initiatives such as the Group’s Asian Supplier summit held in the fourth quarter of the year.

These new franchises, together with existing suppliers, resulted in the Division adding over 88,000 new EDE and MRO products to its stocked portfolio during the year and 50,000 new products which are available on demand. As part of its strategy the Division plans to continue to add additional stocked products to enhance our EDE proposition and to increase its “on demand” range by 500,000 during the three year target period. The Division’s portfolio now includes the majority of the world’s leading semiconductor, passive and electro-mechanical brands, providing design engineers across the globe with increased access to an impressive product range of depth and breadth.

During the year, a number of significant supplier awards were gained, including the Chairman’s Award 2007 from Ohmite, Newark’s largest resistor supplier and the Organic Sales Growth award from Honeywell.

MDD Americas (Newark and MCM)

Statistics from the Semiconductor Industry Association (SIA) showed a year on year decline in billings in the Americas in 2007 of 6.3%. Despite these challenging market conditions, sales in MDD Americas grew 4.1% in the year, with a significant acceleration in sales growth through the second half (third quarter: 4.9%, fourth quarter: 9.0%) as the implementation of the strategy drove momentum.

Underlying operating margin improved to 9.5% despite market pressures and ongoing investment in the strategy.

Web sales in MDD Americas grew by 33.0% in the year and by 48.8% in the fourth quarter. Total eCommerce sales represented 19.7% of total sales in the fourth quarter, reflecting the strategy drive to this higher margin channel and the continuing enhancements being made to the new web platform.

Newark

Newark is a market-leading multi-channel distributor of electronic components, eProcurement solutions and stockroom management services in the Americas. Its customers include design engineers and maintenance technicians in the US, Canada, Mexico and Brazil. By sales, it comprises 93% of MDD Americas. Newark’s sales grew 4.2% in the year, accelerating to 9.4% in the fourth quarter.

During the year, Newark focused on the EDE segment with the business launching a programme promoting over 100,000 products from the Farnell business in to the North American market. Targeted marketing, together with sales process and customer database improvements, helped drive strong sales growth from the smaller customer segment, which grew 28% year on year and 43% in the fourth quarter. Newark’s annual catalogue was delivered in September 2007, promoting over 128,000 products including 24,000 new products, many of which targeted the EDE segment.

Web sales accelerated rapidly during the year supported by search engine marketing, web functionality improvements and multi-channel marketing activities, with the fourth quarter showing year on year web sales per day growth of over 50%.

The business also benefited from the quality leadership recruitment in the year, including a new President appointed in February 2007, a new Chief Financial Officer and a Senior Vice President of Product and Supplier Management, together with a further two supplier and product management industry experts, a new Global Head of Technology Marketing to drive EDE support and programmes, and additions to the Global eCommerce team to continue to develop the Group’s leading edge proposition.

The effective marketing programmes that contributed to Newark’s performance during the year resulted in the company being awarded, in November 2007, 25 Channel Marketing Awards from the National Electronic Distributors Association (NEDA), sweeping a number of categories for the second year running. These included awards for image advertising, integrated marketing campaigns, a corporate newsletter for design engineers, and the company’s website. NEDA also awarded its first ‘Best in Show’ award to Newark in recognition of its achievement.

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 sales grew by 3.1% despite issues surrounding the North American housing market having a negative impact on the home security and home entertainment segment of the business. This performance was supported by a strengthened leadership team during the year with the appointment of a new President and a new Chief Financial Officer. The business continued to benefit from its marketing campaigns including flyers, e-mail and catalogues. Initiatives to re-activate customers resulted in MCM increasing its number of active customers by over 10% on the prior year. Web sales continued to grow strongly, up 23.3% over the prior year, reflecting improved functionality and increased e-marketing spend. Total eCommerce sales accounted for 48% of total sales by the fourth quarter.

MDD Europe and Asia Pacific
(Farnell, CPC and Premier Electronics)

Continuing operations

*Restated to exclude discontinued operations.

Sales were up 4.8% in the year. In Mainland Europe, sales growth remained strong despite tougher comparators and sales in the UK outperformed the market throughout the year. In Asia, the benefits from the Group’s strategic initiatives, in particular the transition of the China business, started to be realised in the second half of the year. The operating margin improved by 0.2 percentage points in the year reflecting continued cost control.

The new web front end launched in the Americas in December 2006 was introduced in to the Europe and Asia Pacific region in April 2007, making available to EDE customers new product associations including cross-referencing for obsolete products, alternative products and upgrades. This, together with other enhancements throughout the year to further improve the speed, simplicity and search compatibilities of the web platform and to increase performance and reliability, resulted in web sales increasing 32.9% in the year. In addition, the Division launched Polish, Hungarian, Czech Republic and Slovakian web sites, as part of its expansion plans into Eastern Europe, and a website in the Asean region for Thailand. This drive of web activity has resulted in new sales records by the web being achieved every quarter with total eCommerce sales representing 38% of total sales by the fourth quarter, with some countries now transacting over half their sales through eCommerce channels. This level of activity has equated to, in Europe, a web order now being received every 10 seconds throughout a 12 hour working day.

Revenue by region

*Restated to exclude discontinued operations.

Mainland Europe

In Mainland Europe, Farnell continued to deliver its strong performance, despite the tougher comparators, with sales growth of 10.2%, the second consecutive year of double digit sales growth. This reflects ongoing development of the business’s multi-channel approach, a strong web performance including the launch of further Eastern European websites, and continued targeted marketing activity, all of which have contributed to the development of the Division’s differentiated EDE service proposition. In October, the business launched “peel pack“ packaging, an innovative packing method for small quantities of semi conductors aimed at providing ease of use to customers. November saw the third successful multi-channel marketing campaign across all European businesses for innovation in EDE packaging and latest technology, resulting in over one million contacts across multiple channels. New catalogues were launched across Europe during the year including first editions of translated Eastern European catalogues, distributed to five countries.

UK

The Division’s UK sales, comprising sales from Farnell UK and CPC brands, increased 2.2% in the year.

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

Farnell UK retained its market share gains achieved in the prior year through its leadership position on RoHS. Despite the difficult market conditions, with the Association of Franchised Distributors of Electronic Components (AFDEC) reporting a sales decline in the UK of 6.6% excluding Farnell, sales showed positive growth over the year as a whole. However, this was not the performance that Premier Farnell expected and definitive steps were taken at the start of the fourth quarter to improve the situation. As a result, fourth quarter year on year sales moved into positive growth compared to the decline reported in the third quarter of 2.4%. The business continues to drive sales via its multi-channel marketing activities with over 1,000 Europe-wide web and email campaigns launched in the year and continued selective direct mailings.

CPC: CPC distributes electrical and electronic equipment and accessories.

Sales for the year increased 4.9% with initiatives in direct marketing, eMarketing and search engine optimisation delivering success, together with actions to reactivate lapsed customers and the prospecting of potential customers. Performance was supported by the launch of the 2008 catalogue in August to over 80,000 customers together with successful direct mail initiatives. Following a restructuring of CPC’s private label offering, the business saw a significant increase in its market share of the mains electrical sector in the fourth quarter. CPC’s web sales grew 30% year on year, following the launch of the new web front end, as the business saw record numbers of unique visitors to the site. Despite pricing pressures, operating margins were maintained.

Asia Pacific

Although Farnell’s sales in Asia Pacific declined slightly in the year, this reflected a first half decline of 6.1% and second half growth of 3.9% with sales accelerating as the region began to realise the benefits from its strategic initiatives.

The first quarter saw the launch of the new Premier Electronics business in China which included the opening of a new warehouse and distribution centre, with the capability to deliver next day to over 95 major Chinese cities, a fully implemented Mandarin language Enterprise Resource Planning (ERP) system, and the launch of a new Mandarin Chinese language catalogue and web platform. An enhanced website was launched in December 2007 giving greater flexibility which has already seen a significant increase in activity. As anticipated, sales in China declined in the first half of the year as the business transitioned from its mainly MRO, lower margin, customer base to become more focused on the growing higher margin EDE segment. This transition started to realise benefits in the second half, with year on year sales growth of 23.4% by the fourth quarter, supported by the four branches now established in the region, including Chengdu and Shenzen which were opened in the third quarter.

The success of the strategy in China was recognised in January 2008 when the business received the Reliable Electronic Component Suppliers award, a pioneering award endorsed by the Chinese Ministry of Information and Industry.

The transition from a traditional MRO customer base to the more profitable EDE customers, which has proved so successful in China, is now taking place across all of Farnell’s South East Asian businesses.

The Australian and New Zealand markets continue to be exposed to global competition. Although sales were down slightly in the year there was an improving trend in the second half with positive fourth quarter sales growth of 2.3%. During the year the business launched a new competitive web offering aimed at meeting local customers’ needs.

The acquisition of our distributor in India at the end of the financial year will allow us to strengthen our position in the fast growing Indian EDE market through our 30 staff and eight branches as investment in the Asia Pacific region continues.

Industrial Products Division

The Industrial Products Division comprises principally two businesses, Akron Brass and TPC Wire & Cable, both supplying high performance products to specialist industrial markets. In addition there is a smaller business, Cadillac Electric.

Sales grew by 5.7% in the year, reflecting a strong performance by both Akron Brass and TPC Wire & Cable. At constant exchange rates, operating profit increased 15.6% on the prior year and operating margin improved despite raw material cost pressures.

Akron Brass

Akron Brass is a market leader in the manufacture and sale of high performance fire-fighting equipment for fire truck 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 all over the world. It has a high share of the North American market and seeks to grow by broadening its product range and reaching new geographic and industrial markets assisted by appropriate acquisitions.

Sales at Akron Brass increased 9.3% in the year. For the first three quarters of the year the business benefited from the strong, prior year, fourth quarter order intake from North American fire equipment manufacturers, which was driven by changes in regulatory requirements. The slowdown in this activity in the fourth quarter of the year was offset by a continued strong performance from the international and industrial segments. Akron Brass continues to develop its international markets, with new opportunities arising in South America and Asia. Sales to the industrial market showed strong growth due to focus outside of the petrochemical markets, with orders from new markets including vehicle and tank washing applications. The development of new lighting products, such as “Diamondback” perimeter warning lights, has received very positive feedback from end users and vehicle builders.

Despite significant increases in the cost of its raw materials, particularly brass ingot, Akron Brass has continued to maintain its margins through cost control and manufacturing efficiencies, including improved assembly processes.

TPC Wire & Cable

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

TPC achieved sales growth of 8.4% during the year with the business continuing to benefit from its successful diversification into non-automotive markets, including rail, wood, utilities and off road equipment. The business experienced significant growth in the original equipment manufacturers (OEM) market with high demand for heavy duty cable for robotics in the automotive manufacturing segment. Sales to automotive manufacturers in the US, who continue to face difficult trading conditions, now only account for approximately a quarter of TPC’s sales.

Despite the continuing raw material cost pressures, in particular the volatility of copper prices, the business has continued to successfully maintain margins through pricing strategies, effective management of the supply chain, and tight control of operating costs.

Cadillac Electric

Cadillac Electric is a small distributor of electrical and industrial automation products and engineered solutions to manufacturers in the United States. Sales in 2008 declined 20.4% to £6.3 million following the known wind down of a major franchise. The business made a small operating profit during the year.