Luceco plc

Hello and good morning, everybody. Welcome to the interim results presentation from the CKPLC for 2020. Slide three, if we can start with that, is a brief overview of the group. All of you will be familiar by now with who we are and what we do. I would just point out one aspect of this slide, which is the wiring accessories business. has had a very strong period and as a percentage of the group total has increased to 44% in the period. If we now move on to slide four, I will take you through the financial and other highlights of the period. So the revenue was 13.4% lower than last year, which in the end was a better performance than we were expecting in March. And throughout the period, improved so by the end of the second half was running about 90 of normal and since the end of the first half it has grown significantly in line with the diy consumer boom which has come about as consumers have been spending more on their homes and not on going out or on their holidays the reduction in revenue however was more than offset by the record gross margins and the stringent overhead control So the gross margin in improvement was all the more impressive in the light of the weak demand, which was obviously a drag on the first half margins, but will reverse in the second half as the volumes improve. This resulted in operating profit 25% higher than last year at exactly 9 million pounds and adjusted free cashflow doubled to just over 10 million pounds. operating cash conversion of more than 100% as the lower activity resulted in the reduction in working capital. The closing net debt of just over 22 million, a huge reduction from last year, equal to 0.8 times first half EBITDA and will show a further reduction in the second half. Adjusted EPS, therefore, of 4.3 pence, almost 40% higher than last year, partly due to a lower effective tax rate. On the dividends, and Matt will talk more about this later, we have revised the policy so the ratio has been doubled up to 40 to 60% of after-tax profits will now be paid out as dividends. and this results in a 3.2 p dividend 1.5 p is the 2020 interim dividend and 1.7 p is the dividend that we would have paid earlier on this year but was suspended because of the virus if i could now go on to talk about the virus itself and how we responded to it obviously because we own a factory in china we were aware of the problem right from the beginning of february which meant that by the time the lockdown etc happened in the uk we were well placed and we had a plan of what we had to do obviously the primary focus was on employee safety and well-being but we were able to mitigate the reduction in activity with productions in overheads in a timely manner as it turned out

demand was actually stronger than we were thinking because our share of the online channel and the diy okay well thank you good morning uh everyone just whilst we wait for john um as john was in the process of saying actually demand was stronger than we thought it might be thanks to our good share of both online and diy markets and so much so that the business had returned to growth in the second half And that allowed us to bring our employees fully back from their initial furlough. So actually, as it turned out, a relatively good outcome at the end of the period. On the operational highlight side of things, we've highlighted before the four key things that we're trying to do to improve our business model. New product development has always been a hallmark of Luceco. That is activity that we've continued despite the constraints and cost constraints of COVID. we realise how important that is to our future. uh we've continued to make the necessary changes to our manufacturing capability to lower product costs um into the both in the past and into the future and john will talk more about that in the in the second if he if he returns we've invested in our warehouse capability in the uk to improve service and lower cost and we've made numerous enhancements to our it capability again to improve service and lower costs so So I think it's fair to say that progress on those key work streams was inevitably slightly disrupted by COVID in the first half as our attention turned to that. It is progress that we expect to accelerate in the second half of the year. Okay. All right. So if we now move on to the financial highlights, starting with the income statement. So working from the top down, I think this just sort of slightly goes over the same ground that John was covering. So H1 revenue came in at 71.6 million. That was 13.4% lower than the previous year. Obviously, that outcome was heavily influenced by COVID. But as John alluded to, actually, the outcome was better than we initially expected it to be. The recovery was quicker than we expected it to be. And we were very pleased to see the business return to growth at the start of the second half. I think the really good news is that we managed to offset the effects of that revenue reduction with progress further down the P&L. most notably gross margin. So a 3.4% improvement year over year to 38.4% for the half. That represents our fourth successive half of gross margin expansion. And if you add up the progress over that two-year period, it equates to over 1,100 basis points of gross margin increase, which is great. And I'll come to talk about the drivers behind that in a second. Suffice to say that we do expect to make further progress in the second half. And again, I'll explain the reasons for that also. On the overhead lines, I think in summary, what we did is we viewed all of our overheads as variable. So therefore, with that mindset, we managed to reduce the overheads by more than the reduction in revenue as a percentage. And that came from acting quickly, having good visibility of the virus from the start, acting decisively, but not doing anything I believe that would in any way compromise the future of the business. So no salary cuts, no redundancies, and NPD, our new product development activity continued throughout. So the good progress on gross margin and the progress on overheads allowed us to actually grow our operating profit by 25% during COVID to 9 million. And our operating margin percentage ended up in the middle of our previously published range of 10 to 15%, which is not a bad performance considering the backdrop. We also managed to reduce the effective tax rate from 23.4% last year to 19.3% for the first half, really through tax planning, making better use of available tax losses. And all of that put together, resulted in an earnings share increase of very nearly 40% to 4.3p. Moving on to the next slide, what I wanted to do here is just give you a sense for what COVID was doing to our activity levels during the half and then into the second half. So what you're seeing there is a daily recalculated assessments of full year revenue, so LTM revenue. And this is really how we were looking at it and managing it. And it literally had to be managed every day during the period. I think the sort of impact of the virus can be divided into three phases. So the first was the first quarter, where COVID was at that stage really for us only impacting China, only impacting supply. And it resulted, as you can see, in a £5 million reduction in annualised revenue. Now, that was obviously a relatively significant impact, but it was an impact that we felt that we could recover in the second quarter. if the virus remained in china only i think obviously as we got towards the end of that quarter it became increasingly apparent that that wouldn't be the outcome and the virus was progressively escaping chinese borders so it began to affect demand also in the markets in which we sell And that effect was more dramatic. So you can see having lost five million pounds of revenue in the first quarter, we lost another five million in the month of April alone. And we prepared the business for really a continuation of that trend. So we had a cost mitigation plan ready to go. We triggered it at the start of April. It reduced our fixed cost base by 40% really overnight. And I think that's what we had prepared ourselves to endure. The interesting thing is that April was really as bad as it got. So underneath all of this, whilst there was an inevitable initial shock, actually retail consumer demand we feel remained relatively robust throughout and we were in a good position to meet that demand because of our good channel access so particularly our relationships with online distributors as well as as hybrid operators as well so that certainly helped and it resulted in the end in a decline in revenue slowing to only 10 by the end of the second quarter if you then roll forward to the second half you can very clearly see a recovery in annualized revenue What has driven that? Well, I think demand on the professional side of the business has been a bit slower to recover, but it did recover in the second half. So it resumed low single digit growth. And we also saw particularly, so we have seen particularly strong demand from consumer channels, some of which we feel is restocking in the channel after having experienced a better than expected Q2. okay so that's the impacts of covid through time if we go on to the next slide this gives you an idea of the impact of covid by geography so the top two charts deal with our uk business um top left you'll see uk retail which is our biggest individual you know part of the business What you see there is a relatively early impact of COVID. And the reason is that we sell to these larger customers on an FOB basis. And that means the customer picks up the products in China, which is difficult to do if your own factory is closed and the port is closed and the country is in general lockdown. So you saw a relatively impact in that part of the year, or part of the period, should I say. I think the most important part of this chart is what then happened to that part of the business in the second quarter. So a really quite good recovery, much better than we thought. And it goes back to what I said before, good continuing consumer demand, which we were well placed to fulfill. And as a result, we feel that we outperformed the market. If you look on the top right, you see almost the mirror image. So relatively little impact on the UK professional channel in the first quarter. The reason being that these customers, whilst there was a supply chain impact for us, these customers were drawing upon our UK inventory and therefore we had a buffer to be able to continue to meet that demand. If you then look into the second quarter, you see a much more meaningful impact. There's probably two reasons for this. So the first is that wholesale networks generally, I think, took a more stern approach to lockdown. So they comprehensively locked down their networks and they did so for longer. And these types of customers perhaps don't have quite so developed online capability or click and collect capability. So the impact for them of locking down was greater. And the second big reason is that organizations inevitably cut back on their commercial capex spend and that affected our LED project business. I would end that just by saying that whilst the impact in Q2 was quite large, I'm pleased to report this channel in total had returned to low single digit growth at the start of the second half. as they emerge from lockdown. On the bottom half of the chart, you can see Europe in the bottom left. The big reduction that you see in Q2 was really just a function of continental European governments taking a more stringent approach to lockdown than perhaps what was adopted in the UK. So quite a big impact. Again, I would just stress that either side of the European lockdown, we actually saw really quite good growth from our businesses there. So no particular cause for concern. And then bottom right, you see rest of the world. Actually, we delivered growth in this geography in the half. Mostly that was a function of areas or regions like the Middle East and countries like Mexico being less affected by COVID than other parts of the world so we could get on with the business of selling. Okay, moving on to the next slide. This is probably one of the more important slides in the deck. Obviously, gross margin improvement has been a key feature of the group's recovery over the last two years. And I think the momentum that we had in this area was one of the big things that insulated us from COVID during the first half. This shows you really the entirety of that journey over two years. So back in the first half of 2018, our gross margin actually was at a historic trough of 27.3%. I think the reasons for that trough were well explained and covered at the time. So we experienced adverse and unhedged movements in FX and in copper prices. And we had not reset selling prices accordingly for various different reasons. I think the initial plan back then was to at least get our gross margin back to its previous peak of 31.9%. I'm pleased to say we're somewhat overcorrected. um so this this takes you through the chronologically almost the things the levers that we pull to reconstitute the gross margin so um the first would be selling prices so we put through a sort of an overdue selling price in 2018 in response to those fx and copper moves i think it's important to say that we have not put any further price increases through since then so none in 2019 none in 2020 and I think that stands as apart from others in the industry. This gross margin story has not been built upon, if you like, the backs of our customers, far from it in fact. so that's the sort of the selling price story from from the very very beginning of this journey fx and copper the environment was quite adverse in 2018 it has improved since then as you can see and the good news is that we have now hedged in at those more favorable rates for the rest of this year and also in large part for next year as well so so that is something that we are at this stage you know not not unduly concerned about but i think the external factors such as as that are not really the biggest driver of the story i think at least as important has been what we have done from inside the business to improve the gross margin for ourselves and in particular Frankly, what we've done is lower the cost of products through either manufacturing efficiency gains or designing lower cost products or seeking better sourcing arrangements with suppliers. And I'll come on to speak about those in more detail in a second. So you put that all together, you reach the destination points of 38.4% for the half. I think the interesting thing is to see the final red square on the waterfall chart, i.e. the end point was achieved despite actually an adverse sales mix. So in the first half, as I described earlier, we had a relative lack of high margin professional sales. That's a situation that I expect to normalize in the future, starting in the second half. And that's one of the reasons why we expect gross margin to improve as we go through the rest of the year. Moving on to the next slide. So this gives you a bit more detail on how we have achieved the reduction in product cost, which has obviously been a key feature of the gross margin story. The top half lays out what we've done to the cost of the products that we make ourselves. So if you look at a consistent basket of goods and you normalize for changes in FX and commodity rates, and you just look at pure manufacturing efficiency, over two years, what we've done in real terms is reduce the average production cost by 12.5%, which is obviously very meaningful. The way in which that has been achieved has been through a very large number of small actions, which would be impossible for me to cover. uh completely i've given you some key things on the on the right hand side there but i would say there's probably two big drivers two foundational steps so the first is we hired a new management team and this management team have spent their careers delivering ever better manufacturing efficiency in relatively low growth environments and that's the first thing and the second thing is that that team have brought a change in mindset to the rest of the team uh and the mindset now is it's not about capacity expansion which was probably the story up until 2018. um the story now and the focus now is much more on every day eating out ever better manufacturing efficiency and continuous improvement and you can see the difference that it's that it has made to our production costs and i think i would like to think there's more to come in this area Okay, and then the bottom half of the of the charts, you can see the same thing, but for third party and source products. And I've given you some examples on the left, particularly in the LED category. So very meaningful reductions in in third party sourced items. How has this been done? Well, the first step, foundational step, was to start paying our suppliers on time. In fact, this is something that we talked about back in 2018. I think our trade creditors at the end of 2017 would double what they are today. So we focused very much on the key parts of the supply deal was the terms that could be offered, not necessarily the prices. And that's what we needed to do to fund the business back then. Well, you know, we are now in a very different place. You know, we are paying our suppliers on time. We've turned the debate to cost. And frankly, we've got more suppliers that we can now speak to as a result of being, you know, on time payers. So I think that has been key. A lot of work has been done in redesigning products to take cost out of them, which has been significant. And the third thing I would say is that probably in 2017 and the first part of 2018, we were a bit too precious about making things for ourselves in-house rather than being ambivalent about making inside or outside and merely focusing on the economically cheapest way of getting our hands on the product. So I think that decision-making process has improved for the better. Okay, moving on to the next slide. obviously i mean the gross margin improvement has been has been significant and it has been from the outside looking in i guess quite dramatic i'm sure there will be concerns inevitable concerns that perhaps this gross margin improvement might reverse at some point in the future this slide is intended to provide comfort on that so what i've done here is i've shown you on the left hand side our mix of business from from wiring accessories accessories through to ross And for each segment, I then sort out what kind of gross margin would an average performer in that space deliver? And what kind of gross margin would a top performer in that space deliver? If you then take those benchmarks and you weight it for our mix of business, what it tells you is a nothing other than average company doing what we do would make a 36% gross margin. Obviously, we see ourselves as something better than average. A top performer would generate a gross margin in the low 40s. so i think far from you know suggesting a concern that this gross margin might reverse what it gives you comfort that the gross margin we're making is sustainable perhaps even you know possibly the opportunity to improve it in the future okay moving on to the next slide I think overheads I won't go through in a lot of detail. As I mentioned at the start, we achieved a 15% reduction year over year. The waterfall chart shows you the things that we did. I think, again, I would just reinforce what I said before, and that is that this is a function of acting early, acting stringently, but not compromising the future of the business along the way. So we were very happy with the outcome for the half. Just as one sort of cautionary note, we do expect overheads to increase in the second half. It's a good reason rather than the bad reason. And as much as the business can now afford to you know bring all of its people back it needs to bring all of its people back from temporary layoff it can afford to pay a bonus and quite rightly so it will incur additional freight costs on extra products sold so overheads will increase i will say that i do not expect them to increase to last year's h2 level which is 22.6 million. It should remain below that, and that will be achieved despite the fact that revenue for that period will be higher than last year. So that's, I think, a good balance overall. Moving on to the next slide. segmental results. So I think the headline here is that all of our major segments, and by major I mean wiring, LED and portable power, all of those either held or increased their operating profit in the period of COVID. Obviously, the only exception is our very smallest segment, ROS, which reduced its profit only very marginally. And actually, I'd expect them to address that in the second half. If you focus on the major segments, if you look at those segments where demand was strongest, so wiring accessories and portable power, for wiring, I would say that was a function of us outperforming the market. Largely, there were some business wins within that, but also it's a function of the superior channel access that I referred to earlier. So we outperformed the market in wiring accessories quite handsomely. Possible power, this is another one where the reduction in sales was below the group average. I think this was probably more the market than us in as much as during the lockdown, there was good demand for leads and reels as people worked from home or improved their homes. So it resulted in a relatively modest reduction in revenue. On the LED side, the reduction in revenue was a bit bigger. That's simply because it's quite a commercial, commercially focused part of the business for us. I think the good news is that even though there was a reduction in the top line, margin improvement, particularly from product cost savings that I referred to earlier, helped us to actually grow the profit, even though with a reducing top line, which was a good result. okay next slide so moving on to the sort of balance sheet cash flow side of things so starting with free cash flow what you can see is another strong and resilient cash performance from from the group um i think it's helpful to think of why are we able to continually do this i mean i would say it's a it's a function of our business model mostly so You know, if I were to put it this way, I think we are sufficiently high tech that we can generate and command relatively good gross margins for the products that we sell. um these sales are sticky um the barriers to entry are reasonably high in terms of the capital requirement or the brand requirement and so sufficiently high tech to generate good gross margins and obviously good gross margins are the key to good cash generation but we're not so high tech that we then have to take a big chunk of that cash and then continually and reinvest it in retooling our factory for new products, retooling our inventory for new products or suffering inventory obsolescence risk. So we're in that sort of happy medium tech kind of ground, which tends to lead itself to good cash generation. And the second thing I would say is that we're actually really not that cyclical. So, okay, we are UK focused, but we are diversified within the UK. And the proof of that is what you've seen in the first half of the year. And we're mostly RMI focused as well, which tends to be that little bit less cyclical. So the cash flows tend to be high and relatively predictable. um i think the only thing that the business um really needed to do to bring out this natural cash flow was just be a bit more disciplined around where it chose to grow uh and also be a bit more disciplined around working capital and both of those two things have been done uh over the last two years and you can see the proof of that pudding here okay moving on to the onto the next slide And of course, you can now see what that free cash flow has done to our indebtedness. And I know this is a slide I've used before, but I liked it so much last time I've done it again. Over the last two and a half years, we've generated £48 million worth of free cash that has come in at a roughly, on average, just under 12% free cash flow margin, which is great. And that has allowed us to do what needed to be done, and that is eliminate the funding risk from the business. uh from 3.5 times the end of 2017 down to 0.9 times uh now so uh great progress in fact so much progress that uh in the end we didn't need to proceed with the covenant resets that we talked about at last year and because frankly they just weren't required uh what we did instead is ex you know instead is extend the term of our existing bank facilities through until the end of q1 2023. So great progress. Obviously, I think that then begs the question, with the balance sheet, quote unquote, fixed, what does one do next with the cash that this business throws off? And you'll see on the next slide what that is. So the first thing we're going to do is to reset the dividend policy to make it more appropriate and fair. So the reason for that is shown on the left hand side of the chart. So again, over that same two and a half year period, the business pre CapEx has generated free cash flow of £58 million. Using our existing dividend policy, only £1 in every £10 has ended up in the hands of shareholders. Now I don't feel that's a sustainable place to be. As it happened at the time, it was very useful because it allowed me to get on with the business of deleveraging the business as you've seen on the previous slide. But with that now having been done, there are two things that we can now do. So the first is to reset the dividend policy. So to increase the payout from 20 to 30% of PAT or adjusted EPS to 40% to 60% of adjusted EPS. We'll start at 40% for this year. We're also going to pay the 2019 final dividend that we suspended at the height of COVID. So that will result in a 3.2p dividend declared at interim. So that's the first thing. And the second thing is that even after having done that, that dividend policy will not get in the way in any way of our growth strategy. So we will continue to be able to fund CapEx appropriately in the business. And we should actually, as you can see from the pie chart, we should have lots of free cash still left to do other things. And I would like it if that other thing was emanating. Moving on to the, I think my final slide, yeah. So balance sheet, I won't go through this in much detail. It's really just a function of the actions I've previously described. I think the standout points on this slide would be that in real terms, Through COVID, we reduced our working capital by 4.5 million pounds or 8%. And we did that by very proactively managing inventory. So we started reducing production output and reducing purchasing long before the UK ended up in lockdown. And we put extra emphasis on debt collection. So during the period, we have managed to avoid any material bad debts, which is great. So appropriate management of the balance sheet throughout. I think that's it from me, Tamsin. I'm hoping that John might now be back online.

Yeah, so as I said earlier, we were determined not to lose this year. in terms of progress in all the other areas of the business. New product development, which is an area which historically has driven significant growth throughout the group, has continued as per normal throughout the COVID period. Office electrics is a new channel and a new whole sort of business area that we're particularly excited about, and we're launching a range later on this year. This is sort of targeted at commercial offices. which unfortunately of course with the covert timing maybe isn't now everyone's focused but when things return to normal there is a whole category of electrics on the desk behind the desk and under the floor which is an area we've not been involved before which um seems to be high margin not very well served and we believe that we can do some good business in this area and then there's a list of other products that we've been working on We've also continued to work, as Matt said earlier, on improving our factory in China. So basically more automation, more sort of lean manufacturing processes. And ultimately, this hopefully will enhance the group margin in the years to come. Other key initiatives we've been working on is to improve the customer experience. So we've invested a lot in the warehousing and distribution setups, particularly at our UK warehouse up in Telford, a warehouse management system, a demand forecasting and MRP system upgrade, all aimed at enhancing the customer experience such that we have a best in class proposition. We've also been investing in IT enhancements across the group. We had a cyber attack about a month ago, which we were able to handle reasonably well, but as a result of which we are investing in further cyber security enhancements. We've also been investing a lot in our product assets in terms of the digital marketing space because more and more of our customers are doing more and more transactions online, which means that all of our product marketing efforts have been targeted at improving how our products appear in the digital space. As Matt spoke about earlier, we consider that M&A will be a future key driver of the growth as the core business has become highly cash generative. In terms of funding capacity you can see the graph in the top left has improved steadily over the last few years and by the end of this year would be north of about 60 million pounds and that is operating within the in the two times maximum leverage ratio. in terms of the priorities obviously wiring accessories is a very high margin business that we like a lot however as you can see on the right hand side wiring accessory targets in europe are few and far between we've actually only i identified nine targets whereas the led space is probably more likely for future acquisitions just because there are so many more appropriate targets meeting our criteria. We would, however, not limit it to only wiring accessory and LED targets. We'll also be looking at product adjacencies and or areas where we think we can use our manufacturing expertise in China. Obviously, the more product we can drive through our own factory, the higher the margins we can make. And if we move on to the next slide, which is the current trading and outlook. Current trading is strong. We have a pretty good idea now of the result for Q3. And we have a strong FOB order book for October and November. the consumer sort of diy boom which i spoke about earlier has been benefiting customers like amazon customers like screw fits customers like pool station as well as the diy sheds where we have an extremely strong presence these higher volumes in the second half will also result in higher margins as we're able to put more volume through our factory and the great cash conversion will also lead to a further reduction in the leverage ratio. For the full year for 2020, as we have said in the R&S announcement, unless there is further macroeconomic headwinds at the end of the year, we do think we can make significant progress beyond the guidance that we have put in the market. However, there is obviously a huge amount of macro uncertainty as to what may happen towards the end of this year. Into next year, again, the outlook remains uncertain, but we have been successful in picking up some significant new business wins in some of our larger customers. And that with all the internal improvements we can make, which we believe will result in higher gross margins, should mean that we can make further progress next year. There is, however, a question as to how much demand will be affected as and when people leave their homes and return to work in their offices, and also what the wider economic landscape might look like in the post-COVID period. But having said all that, we remain extremely optimistic about the future. And that's the end of the formal presentation. I will now hand over to Tamsin to manage any questions.

And we'll go to Daniel Cunliffe from Liberum. Daniel, go ahead and ask your question.

Hello, good morning, gentlemen. Thanks for the question. Hi, just two quick ones from my side. Firstly, I was interested in the slides on the M&A targets. You talk about 10% to 20% of potential acquisitions that meet your criteria. I think about 10% in wiring and just under 20% in LED. Did you be interested in what these acquisitions um in measurements of your criteria um that sort of involves i can see the 10 margin but just just any more color around that uh criteria uh would be uh useful and any any types of multiples you think is uh relevant um and then i guess just second question John, you touched on sort of progress beyond the guidance. We can see that you'd be heading for 23 million, around 15% margins. If you achieve that during COVID, 15%, is it fair to assume that the 10 to 15% through cycle could well move to the upside once we get more clarity around macro and COVID, et cetera, et cetera. So those two would be great. Thank you.

Hi, Dan. In terms of the acquisition criteria, I mean, obviously size is a relevant factor. I mean, we're targeting up to 50 million of turnover, possibly more. We don't want to bet the house on a single deal. Equally, we don't want to do loads and loads of small deals because the integration activity takes a lot of management time. So somewhere in the region of 10 to 50 million, we think is our sweet spot in terms of revenue. There aren't that many wiring accessory businesses that are not owned by sort of major multinationals. The likes of Snyder, you know, Legrand, Honeywell, you know, Siemens, Hager. These are the brands and the businesses that own most of the wiring accessory activity in Europe. So, you know, the criteria we've got there are businesses that we think are of the right size, but also potentially for sale at some point in the future. um and there aren't that many of them in terms of led there are quite a lot more i mean there are just lots more led companies out there but in terms of quality and defensibility and higher margins we think wiring accessories is a better place for us to look in terms of multiples you asked the question i mean we paid we paid six times for uh for kingfisher lighting but that was a relatively small operation i think um sort of eight times for um um a project led businesses are about right and up to 10 times for um a wiring accessory business that's ebitda uh in terms of operating margins uh yeah i think you're right i mean i think uh if we're making up to you know if if we're making close to 15 this year i think it's likely that you know in a normal year we can make higher than that we don't know where the limit of the gross margin is i mean it's not i mean i doubt we can get it much higher than sort of early 40s but we do think we can push it into that region um so that would imply an operating margin you know north of 15

If I can perhaps just add to that, John, I think that's right. I think at the very least, I would say that if we can achieve it in the year of COVID, we can get used to life perhaps more towards our existing range than the bottom. I think that's the least you could say. Just as a word of caution for 2021, and I think we've referred to this in the announcement, I think the overheads have been really quite low. Some of that, a very small part of that has come from the government furlough scheme. A big part of that has come from the fact that we've had relatively low sales and marketing costs relative to the revenue that we've still been able to generate. I think there is upside to operating margin, but I think the upside potential for 2021 is perhaps limited because those benefits will naturally reverse as we get into 2021.

If I can just add, that would affect the operating margin percentage. It wouldn't affect the operating margin value because without COVID, we would have made more money this year. We'd have had higher revenue, we'd have had higher overhead, but the higher revenue would have more than outstripped the benefit that we've had from lower overhead. So next year, if we have higher revenues, because we don't have COVID, as long as the margins remain intact, we will make higher operating margin as an absolute value, maybe not as much of an improvement at the percentage level as obviously Matt was referring to.

And now we'll go to Christian Hinderaker from Liberum. Christian, go ahead and ask your question.

Yes, good morning, gentlemen. Two from me as well, if that's okay. I guess firstly, perhaps for Matt, on the impressive 23% wiring margin up to the basis points year-on-year, clearly very solid, particularly when benchmarked against peers like Legrand, which is sort of seeing about a 20% margin. Where should we think of this going forward? Is 23 the peak, or how should we think about that? And then For the second question, perhaps, John, given I think this might be under your auspices, slide 10 you flagged significant product cost savings across a number of your LED ranges, and I guess would be grateful for a bit more clarity as to how much more there may be to go for here, and indeed whether this is perhaps reducing your few counts or continued product development that you've discussed on the call, or perhaps external sourcing measures. Thank you.

Yeah, so let me just deal with the first one. Yeah, so you're right. I think our wiring accessory operating margin now benchmarks really quite well against some big players. I think it really... And if you think about, well, where did that gross margin improvement come from? Obviously, it's subject to the same gross margin waterfall benefits that I showed earlier, but disproportionately... manufacturing savings impact wiring accessories, because pretty much all the factory does for us, you know, mostly is wiring accessories. So there's no doubt there's been a benefit there. And I would, as we've alluded to, we think there's more manufacturing efficiency gains to be made. We intend to invest to make that happen. and that would logically come through the wiring accessory segment. So I think there is room for upside. I think it's the same cautionary statements as I made earlier. There were certain things this year that will make our operating margin percentage better, and they will present a little bit of a headwind for all segments in 2021. But save for that, I think there's more that we can do on wiring accessory operating margin in total.

Okay, shall I answer the question on the LED? Yeah, I mean, it's interesting. I have been kind of thinking for several years now that the sort of LED sort of cost-down activity and the price deflation in the market would sort of level off. And yet, year on year, we find ways of doing things cheaper. That is partly to do with the chips themselves and the way that we operate the chips and we drive the chips accompanying electronics. I mean, the key question is not really what are the further savings we can make. The key question is how much of those savings can we hold on to and how much of those savings do we need to put into the market? We've, over the last sort of two years, we've improved the margin. We've improved the gross margin in the lighting business by about 10%. Now that's partly as a result of these sort of cost down engineering activities, but it's also partly as a result of So moving the product range out of the more highly commoditized stuff and into the more sort of technical project based stuff. LED lamps, for example, otherwise known as light bulbs. I mean, that has become a highly commoditized area where we can make very little margin. When we first launched LED, that was about half of our revenue. Now it's almost nothing. So we've made a major shift within the lighting business away from commodity over to sort of technical project specification based. And that has driven higher margin. I think that the rate of the cost savings we can achieve will slow down and the deflation in the market will also slow down. We have obviously been able to improve the margin because our cost savings have been ahead of the market deflation. And hopefully we can continue to do that. It's one of the reasons why the LED business hasn't grown as much as we would have hoped it to have grown. Actually, in the underlying volume terms, it has grown stronger. But in terms of the value that you guys see, it hasn't because of the market deflation. But within that environment, we have improved our margins.

And we'll go to Kevin Fogarty from Numis. Kevin, we're just unmuting you. Go ahead and ask your question.

Good morning, Jen. I'm A couple of questions for me, please. Firstly, Max, thank you for the margin progression that's been achieved. Obviously, you know, selling price, inflation hasn't been a big driver here. But I guess if we think about the sort of post-COVID-19 sort of demand recovery, et cetera, and in terms of what the competition is doing, what do you think the prospects are for some price inflation creeping in, you know, that may sort of impact margins positively as we roll forward. And just secondly, in terms of M&A, can you help me understand just the sort of pace of M&A activity you're comfortable with, you know, bearing in mind the balance sheet progress that you've made in recent years, just in terms of how quickly you see that sort of gearing up as you go forward. And just as an add-on in terms of M&A, I guess You know, if you think about the areas of potential synergy benefits for C-System Group, I guess wiring accessories is clear, LED is clear, but I just wondered, you know, areas such as security and fire systems, those types of adjacent markets, just how synergistic they might be to the group rolling forward.

Okay. All right. Thanks, Kevin. John, I'll just, I'll deal with the sort of price inflation one and then perhaps you can cover the M&A side. So I think it's fair to say that there has been price increases on the professional, UK professional side of the business, or at least in the market. which we have not followed. And I think it's fairly typical to see a sort of a drumbeat of price increases every year, particularly on that side of the business. So we'll have to see. how the macroeconomic picture develops. We'll have to see in particular what happens to sterling RMB, which can sometimes either drive a price increase in the UK market or perhaps delay one. But I think, you know, the time is coming where, you know, there will, there's likely to be a movement on pricing in the UK market in the, let's say within the next 12 months. And then John, over to you on the M&A side.

yeah thanks if i can just add on the on uh on the pricing i mean we would have had a trade price increase in april this year we didn't because of because of covid we were gonna then have one in the autumn of this year and we haven't because of other reasons to do with what's happening in the warehouse and because our margins are so healthy um we thought we'd take the opportunity maybe to grow our share but we will definitely put in um a trade price increase um q1 next year i guess we would normally do one every year around that time uh it's not a big activity would be probably three to four percent and it only affects the uk trade um other pricing it's a sort of ongoing discussion with customers all the time and matt says you know the r b us dollar exchange rate particularly on the fob business is an important driver as is commodity prices and other factors such as that these results and our higher margins will obviously be seen by our customers so the larger customers having having a price negotiation is harder than the smaller ones who will be impacted by the trade price increase that we would put through next year in terms of the m a um and the synergies that we may or may not be able to get from other categories I mean, obviously, wiring is very easy for us. We know a lot about making those things. LED lighting, again, we know quite a lot about manufacturing that. And the biggest synergy, I think, on any acquisition would be to pick up the products and put them through our own factory. I mean, you're right, Kevin, that in terms of sort of fire and security, the manufacturing synergy might be harder. It doesn't necessarily mean it's impossible. I mean, the underlying technology, which is probably sort of electronics plastic molding metal bashing is probably the same but certainly in in those other categories we would have a sales synergy so you know we have a very strong position in the electrical wholesale market in the uk for example and we're building drawing positions outside of these markets internationally. So if we could find a business which, for example, had a relatively small share in the electrical wholesale market, we could use our relationships to increase that share.

So we have a question from Andrew Shepard Barron from Peel Hunt who says, it's a great set of results. One question, how do you see long-term organic growth and how much of that would come from new product development?

So Andrew, we've guided previously to total growth between five and 10% for the group through the cycle. And I would see that, I would like to think we could achieve something towards the top end of that range rather than the bottom. And if so, I think it would come sort of 50-50 from organic. And M&A. In terms of NPD, I think there's an interesting section in the last annual report where we highlight how much of our revenue today has come from new product development within the last three years. Suffice to say, it's a very big chunk. Now, some of that is creating new variants of an existing product rather than range extension. But MPD has always been a key driver of that organic growth line. And I see no reason why that would change into the future. I think it's a key part and it's the reason why we continue to invest significantly in that part of the business.

And thank you. And we have a final question from Christian Hinderaker at Liberum. Christian, we've just unmuted you. Go ahead.

Thanks, Tamsin. Yes. Thanks, gents, for taking the follow-up. Can I just ask, perhaps, can you talk a little bit about, I know you mentioned it, Matt, the sort of barriers to entry in terms of perhaps less so production, but in terms of your distribution structure, I guess, split between your relationships with the big box customers taking FOBs uh, sales and then also your, your sort of culture distribution center.

Yeah, I mean, you're right. I think probably the individually most significant barrier to entry would be the manufacturing capacity required to serve the market. I think the second, probably, if anything, slightly bigger barrier to entry is branding. I mean, I've learned to never underestimate the power of our brands, particularly really across the portfolio, but particularly within the wiring accessory category. It's very, very hard to convince an electrician to stop installing a socket that he's installed for probably most of his professional life in favor of some no brand that's just arrived on the market. And I've got an electrician here in my house this week, and of course I'm grilling him and all these things. And this is what you find. So brand is very, very important and sticky. And yes, I think the warehouse side of things is probably not a big barrier today, but I think it will become a bigger barrier for us in the in the future and as much as we intend to invest in it to make sure that the service we provide is kind of unsurpassed in the industry. But the bigger barrier I think today is, as you alluded to, it's not just the sales force, it's the relationships that the sales force have with longstanding customers where the customer knows that we are going to be able to deliver what they want, high quality, low failure rate, no customer complaints, and do it repeatedly. So that trust takes a long time, I can tell you, to replicate.

I would also add that the relationships we have with the likes of Screwfix, B&Q, those guys, are formed over many, many years. I think we've got something like 500 lines within Screwfix. We've been a sole supplier to B&Q in these categories for, I don't know, about 15 years. I mean, these relationships are formed over many many years and they are not easy and we've had a fantastic fair record of maintaining them so i'd say that was a big barrier to entry for others as well