Luceco plc

Thank you very much everybody for coming this morning to hear our results presentation. If we turn to slide three on the presentation, I will run you through the highlights of last year. Basically, these results are almost exactly in line with the trading statement at the end of January. So last year, we increased our revenue to 176.2 million, an increase of 2.4%. We lost significant ground in the first half, which was more than recovered in the second half. But we do believe that without COVID, our sales last year would have been stronger. We outperformed the UK market and we increased our market share, particularly in the wiring accessories category. Our adjusted gross margin increased significantly up to almost 40% and has increased over the last three years by almost 11%. And this has driven a much more profitable performance overall from the group. It has also greatly increased the amount of cash the business has been generating. Adjusted operating profit then increased from 18 million last year to over 30 million this year at a 13% free cash flow margin. And that resulted in us reducing the leverage to half a tonne of EBITDA. And EPS increased from 7.7% last year to 15.5% this year. So more than double. As a result, we were able to increase the dividend up to 40%. So as we have said before, because of our operations in China, we had a a good early warning on the COVID pandemic. And we took strong and decisive actions to reduce our costs and to maximize our operations throughout the period. So our factory was closed in China, but only for a few weeks. And after that, things returned in the first quarter quarter almost to normal however in the second quarter with the lockdowns um in europe etc we lost significant sales however into the second half of the year as the as the shift towards online trading happened in our marketplace we were able to gain significant market share So the outlook for 2021, the revenue growth that we experienced towards the end of last year has actually accelerated into this year. And we are now expecting around about 100 million of revenue in the first half. However, raw material cost inflation means that there will be temporary reduction in the gross margin. But we would think that by the second half, with the price action we are taking in the market, we can offset the cost pressures, which will mean that by the end of the year, operating margin should be similar to last year at approximately 17%. We are therefore confident that we can move the business forward this year, both in terms of revenue and in terms of profit. And with that, I will hand over to Matt.

Okay, thank you, John. Morning, everyone. Let's move on to slide five. So just a quick tour of the income statement. So starting with revenue, as John has mentioned, revenue grew by 2.4% to 176.2 million. Absolutely, that was achieved despite COVID. So there's no question that COVID caused some good conditions in parts of our business, but it caused also just as many tough conditions. So therefore, in our minds, it was a headwind overall. And therefore, it's logical to think that the revenue growth in the business should accelerate in 2021 as hopefully the world and Luceco move beyond COVID. Second conclusion, as John has mentioned, is that that was undoubtedly better than the market. So to give you some numbers around that, the UK wiring accessory market, we believe, declined by 6% in the period. Wiring accessory sales, which are overwhelmingly made into the UK market, grew by 16%. So a very significant outperformance. The reasons for that I'll explain in a second. Turning to gross margins, so 3.6% improvement in the year to nearly 40%. Key message here is, yes, again, that progress was delivered almost exclusively from within the business. Similar drivers to what we mentioned at the half year, so manufacturing efficiency gains, the benefit of designing and sourcing lower cost versions of products that we don't make. And also in the second half, a mixed benefit from a really high proportion of high margin wiring accessories. So good progress on gross margin to slightly bring you up to speed on that. Yeah, there's no question we are entering, have entered an inflationary cost phase. And I've got a slide specifically on that later. Turning to overheads, tight control of overheads throughout the year, certainly in the first half when we needed it most. but also retaining those benefits into the second half as well, as we held on to new ways of working that we could operate at lower costs. So we're saving some benefits into 2021 as well on that. You put all of that together, what we ended up with was record operating profit, two thirds higher than the previous year, actually from a similar revenue number. Progress on the P&L actually didn't stop at that point. So not only did we deliver record operating profit, but we delivered the group's lowest ever effective tax rate, so down at 16.4%. There were a couple of one-offs within that, but I would say that the work that we've done on tax planning over the last couple of years should yield an effective tax rate below 20% up until the UK CT rate increases in 2023. And then the combination of that low tax rate and record operating profit doubled the earnings per share to 15.5p. Okay, moving on to slide six. So this is an update of the slide that I gave you at the half year. So just as a reminder, what it shows is a daily recalculation of LTM sales. So in other words, every data point on that chart is the sales for the preceding 12 months running up to that date. The reason why I'm showing this to you is so you can see in real terms almost live what COVID was doing to our revenue throughout the year and also into this year. And I'm expressing that to you in the context of a number that you would most recognize, namely our annualized revenue. I won't dwell too much on the first half because that was reported at interim, but just as a very brief reminder, Our factory, as John mentioned, did close for a couple of weeks in February as COVID arrived in China. It then recovered or manufacturing output recovered really quite strongly for the rest of the first quarter, only for then the group to experience a demand shock at the start of the second quarter as our markets were placed in lockdown. You can see at the very start of that second quarter, there was a downward trend, relatively rapid downward trend in revenue. Some of our customers responded to that with, you might say, a knee-jerk cancellation of orders. The really interesting thing for everyone, all of us in the industry, is the residential demand actually remained really quite strong. So people at home spent more money on their homes. But it's important to stress that we benefited disproportionately from that because of our business model. So we have a very high share of multi-channel capable distributors who were extremely well positioned to fulfill that demand during lockdown. So much so, in fact, that those two benefits actually allowed the group's revenue to flatten out at the end of the second quarter. As we got into the second half, we saw an acceleration in our revenue. Again, that was driven by a continuation of strong residential demand, but we then also got our second business model benefit of the year. So we managed to rapidly increase our manufacturing output to meet that demand, particularly when the professional wholesale channel reopened. And that allowed us to gain share because of our vertically integrated model and the control that we have over manufacturing output. So that was a significant improvement. I think the one part of our business that really struggled throughout the year would be the commercial and institutional side, particularly affecting Project LED. I think the reasons for that are understandable. I would say the conditions did get better as the year progressed and have got better still in 2021. Now, talking of 2021, if you look at the far right-hand side of that chart, you can actually discern an acceleration in the rate of growth of revenue. What's driving that? Well, continued strong demand in the business, but also we are obviously now approaching some easier comps. So we are very confident that the growth rate that we'll have in revenue for the first half of this year will be higher than what we experienced in the fourth quarter of 2020, which as a reminder was 23%. Okay, moving on to the next slide, slide seven. So I think it's clear from what I've said that the impact of COVID did differ depending upon what part of our business you were looking at. And this slide provides some color on that. You can certainly look at our business in different ways. So historically, we've explained the trends in our business in terms of the products that we sell. I think what is just as relevant and particularly relevant for 2020 is the channels that we sell those products through. So this slide shows you the revenue growth dynamics of each channel. Now, just as a reminder of the channels that we're in, if you look at the top of the slide, On the far left hand side, we sell through a consumer channel. So we sell to retailers such as DIY Sheds, Peerplay online retailers such as Amazon and the High Street Grocers. On the other end of the spectrum, on the right hand side, we sell to professional distributors as well. So professional wholesale, which I think needs no introduction. But also what we call professional products. So this is where we are agreeing the sale of the product, particularly LED, directly with the contractor, architect, designer, etc. So quite a different channel to market for us. In the middle between those two, you have what we call the hybrid. So these are guys that sell to both consumers and professionals. But critically, they sell to those markets using a quite sophisticated multi-channel ordering and fulfillment capability, which was very relevant during COVID. So what are the key conclusions from these charts? What I see is a clear benefit from our strategy. So we sell to all of these channels. Other competitors of ours will pick one. They may well pick the professional wholesale channel, and they'll focus on that. If we had done that, then it would have been a more entertaining year, I can tell you that. So we have channel diversity. We also, as you can see, benefited to a large degree from our association, early association established years ago in the hybrid channel. The other thing you can see in this chart is that, okay, the first half was tough for most of our channels. As we got into the second half, you could say that all of our channels had found a way to work with COVID. All of our channels were either growing or broadly flat as we exited the year. Okay, moving on to slide eight. I think that recovery that you saw in the second half it did place strain on our manufacturing output. So to put that in context, the group as a whole grew by 17% in the second half, and we worked very hard to keep up with that demand. And I think that was particularly difficult when you consider what happened to our manufacturing in the first half, and this slide shows you that. So it's the manufacturing output of our own facility by month. In February, because of the lockdown in China, we managed to only make half a million pounds worth of product. 10 months later, we had grown that by a factor of 20 to record levels. And in fact, the output was double the prior year average. If we had only achieved the prior year average, you can see quite how different our year would have been. So we owe a lot to the hard work done in our factory in the second half of the year to increase our output to keep up with demand. Now, all of our competitors, of course, were trying to do the same thing. But I will tell you that a lot of them do rely on OEM manufacturing. And it is quite a lot harder to get an OEM to increase output in this way when you might be one of only 20, 30 customers that they serve. So a big benefit to us from vertical integration in this year. Okay, moving on to slide nine. So as John referenced at the start, I mean, this has now been an extended period of profitability improvement for the group. I think it's helpful to look back on over that period and just remind ourselves of how much improvement have we seen. and where has that improvement come from? So if you look at the three-year period between 2017 and 2020, we are basically now making twice as much profit from a not dissimilar revenue line. Where has that improvement come from? It's come from gross margin. And the really interesting thing for me about this is if you look at the external environment in 2017, so far as cost inflation was concerned and cost prices, it was actually very similar to the situation that we find ourselves in 2020. So we saw in the second half of 2017 cost inflation. just as we saw most recently in 2020. And you can see in the first half of 2018 in the chart in the bottom, you can see how we responded. So we reset our selling prices appropriately, successfully, and we did so without losing any customers. And I mentioned that because it is relevant to the inflationary cycle that we are currently in. The selling prices wasn't the only lever that we pulled. We also drove a lot of gross margin improvement from within. So a significant benefit from selling more wiring accessories than we did three years ago. A significant benefit from lower cost manufacturing, and John will talk to that later, as well as the benefit from sourcing lower cost OEM products as well, particularly in the LED category. So where do we find ourselves now in 2020? Well, we have a gross margin of 40%. And if you recall from the half year, I said our benchmark range, looking at what we do and what others are capable of, should be in the range of 36 to 43. So therefore, we're in the middle of our expected range. And therefore, you know, I think we are confident that in normal conditions, there is more gross margin opportunity for us out there, as I say, over time in normal conditions. Now I stress the normal conditions, because if you move on to slide 10, it's quite clear that we are probably not in normal conditions right now. So Yeah, we are undoubtedly in an inflationary phase, and that's being driven by, you know, economic recovery from COVID, as well as strong demand for goods versus services. This is obviously affecting us and all manufacturers. And I would say the collective impact of this on manufacturing right now is really quite unprecedented in terms of the magnitude of the increase, as well as the speed of the increase. And I've given you four charts there that show you what I'm talking about. So these are probably the most impactful inflationary drivers that we have within the business. The US dollar RMB rate, the cost of copper, plastic, and then bottom right, you can see the cost of a 40 foot sea container from China to the UK. And I've actually given you the annual financial cost of each. So you can sort of do Euromaths if you want to. You can see from the charts, there's been some really quite big increases over recent months. The good news is the top two charts, which are the biggest items for us, they are hedged. So that does delay the impact of spot price changes. But of course, it doesn't avoid the impact longer term. So what we're flagging up today is that at current prices, we would expect these inflationary pressures to increase our annual cost by 15 million, of which 10 million would come through in 2021. And 5 million would come through later because of hedging. So in terms of the takeaways from the slide, what would I say? I would say, well, look, I mean, take some comfort from the fact that we know where this cost inflation is. We know how much it is. And I think what I would say to you today is that we have a robust plan in place to fully offset this by the end of the year. I'm not going to go into the detail of what that plan is. I don't think it would be commercially sensible for me to do so. But I would refer you back to the actions that we took at the end of 2017. The only thing to flag is that whilst we're confident of offsetting it by the end of the year, there may be a small timing difference between us experiencing the cost and us offsetting the cost in 2021. And that could create a bit of gross margin pressure in the year. The good news is that we've got more than enough revenue growth to offset that by leveraging our fixed costs. And so therefore, we should expect the operating margin for 2021, operating margin percentage, to be similar to the published number for 2020. Okay, moving on to slide 11, just quickly on overhead. So a lot of work on overheads during the year. If you look on the far left-hand side of the chart, you can see the overhead cost base, the half yearly overhead cost base that we entered the year with, so 22.6 million. We took 4 million out of that in the first half. So a lot of cutbacks on discretionary costs, as well as some furlough income from the government. We then added back 2.2 million pounds of that in the second half. I mean, obviously we ended the furlough claim. The strong performance drove some variable pay. And actually the really interesting thing is that we delivered yet more reductions in discretionary cost savings. And it's those kind of savings that we are now holding on to going into the new year. So 1.7 million pound saving in half yearly costs as we entered the new year. Now, I don't think we'll hold on to all of those in 2021. But I think it gives you reasons to believe that our 2021 overheads really should be lower than what we spent in 2019. And that's despite the fact the group will be considerably bigger than it was in that year. Okay, just quickly on cash. So another year of double-digit free cashflow margin for Liceco. And actually the interesting thing is that was delivered despite an increase in working capital. And that increase was just purely driven by really quite high growth in activity in the fourth quarter that just left some working capital on the balance sheets at 31st December. That position is normalizing already. I'd expect it to normalize by the end of this year in full. And the other thing to highlight is the capex did slightly drift below our targeted range of 3% to 4% of revenue. And that's just a COVID disruption factor. As we get into 2021, it really should return to the previously guided range. Okay, quickly on to slide 13, the balance sheet. You can see the increase in working capital there. So the growth rate in net working capital was very similar to our Q4 revenue growth rate. You can also see a big reduction in net debt. And as John has said, we're now down at 0.5 times EBITDA, which gives us the capacity to do things with that. Okay, moving on to slide 14. This is my final slide. So financial goals. So we set some financial goals back in 2019. Within 18 months, we've exceeded them and we've exceeded them despite COVID. So therefore, you know, clearly we need to reset them and we need to aim higher. So the targets, the new targets on the right hand side reflect that. In terms of those that we have reset, so we have increased the targeted range for operating margin, free cash flow margin and return on capital. The driver for all of those is higher profitability. And I think that, if nothing else, combined with our results for the year, demonstrate our long term potential. Okay, with that, I will hand you back to John.

Matt, thank you very much. That was excellent. So I will firstly run you through the different categories and then look at different aspects of the business where we've made improvements throughout the year. Wiring accessories on page 16, extremely high margin. and the margin improved yet further in the year as did the revenue. And if you look at the outperformance in the hybrid category at 33%, you can see that we have gained significant market share. We think the market for wiring accessories last year was about minus five and our growth was about plus 16. ScrewFix and ToolStation have had a particularly strong period and continue to do so. You probably saw the Kingfish results which were out yesterday. LED lighting operating margin increased significantly in the year up to almost 6%, but it is still some way below where we'd like it to be and a long way below what we achieved in wiring accessories. You can see how the projects and the wholesale channel particularly had a very difficult year. So commercial investment in LED retrofits was obviously very severely impacted by the pandemic. But we have seen that business recover at the end of last year into this year. would like to think that overall over time we can get the operating margin of the led business into double digits but that would require our international startup businesses to reach a reasonable scale because those businesses are currently break even. In fact, if you look at the contribution margin at the bottom of that slide, you can see that in the UK we made almost 16%, whereas overseas we made only 2%. So it's the international businesses that need to grow in order for us to improve the overall operating margin in LED lighting. Portable power on slide 18. Again, you can see the margin has improved slightly. but the revenue actually went backwards. We lost some customers in 2019, which affected ourselves in 2020, but we've had a strong start to this year. Moving on to slide 19, I'll talk about some of the reasons why the gross margin has improved. So we changed the management of the factory in China in 2018, and they've done a huge amount of work on improving the efficiency and reducing the cost. As you can see, overall, since 2017 to 2020, we've reduced the cost of the wiring accessories made at our factory by over 9%. investment in automation, investment in engineering changes, investing in the process and the management and the skills of the people that has yielded enormous results. And we believe there is significant improvement still to come. Moving on to slide 20, there's a small analysis here of the Kingfisher acquisition that we made in 2017. So we bought the business reasonably cheaply at only 7.5 times EBITDA. And since then, we have improved it considerably. And you can see on the slide how we have done that. One of the things which has been very successful is transferring some production of some of their key products from third parties into our own manufacturing, which has greatly improved the gross margin and the quality of those products. So the return on investment at 15%. The next slide, 21, looking at the M&A strategy. So by the end of this year, we will have north of 70 million to spend on M&A. And so it's a key focus for the group for the next few years. We've listed here some of the product adjacencies that we are actively looking at. We are currently involved in a couple of processes, one or two of which may hopefully result in us doing something later on this year. As I say, it's a major focus of the group because we understand that we need to get the re-rating by being viewed as an aggregator. Slide 22, increasingly important to the investment community. So we are looking now at our carbon emissions and how we can offset them. You can see the numbers here, you know, that we have for scope one and scope two. Actually off, I think scope one and scope two is quite easy and not that expensive for us. would cost less than £200,000 per year, we think. So by the end of this year, we will have a plan to be carbon neutral within our own operations by the end of next year. It's also worth pointing out that, as you can see in the graphic on the top left, the fact that we sell LED lighting does mean that we are at the moment moving more carbon via selling highly efficient lighting products than our business is actually emitting. So onto slide 23, just to reiterate the outlook statement, as Matt has said, and I said earlier, the revenue growth has accelerated into the first half of this year from 25% in Q4 up to near a 40% in H1. mainly driven by market share gains as a result of our part of the customers outperforming the market, but also new business wins that we've made throughout last year. Matt taught a lot about the cost inflation We believe that that will result in a lower gross margin in the first half, but we will be able to recover it in the second half, so we should exit the year at a similar gross margin to that that we achieved last year. However, the gross margin for 2021 is likely to be below what we achieved for the whole of last year. The operating margin, however, with the extra revenue should be in line with what we achieved last year at a record level of 17%. And therefore, as I said earlier, we are confident that we can move the business forward both in terms of revenue and in terms of profit. So with that, I will hand over for any questions.

Thank you. If you would like to ask a question over the phone, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach your equipment. Again, please press star one to ask a question. We'll take our first question from Kevin Fogarty from Numis Securities.

Morning, Janice. Morning. Thank you for... Hi there. Thanks for taking my question this morning. Just a couple, I guess one in terms of your channel positioning, obviously it's pretty clear the benefits of online and hybrid positioning during the pandemic. I guess sort of two questions around that, if I could do one, are you at an advantage to any of the competitors from the point of view of channel positioning? And secondly, how has your position there changed with the likes of Screwfix, for example, just in terms of product lines, you know, where is that going currently? And then secondly, if I could ask just a question in terms of strategically, you know, you highlighted the M&A opportunity again, and I just wondered what the landscape sort of looks like, you know, has that changed materially over the last six months or so, you know, particularly with, you know, post-COVID, what that might have done to valuation expectations in particular?

Okay, thanks, Kevin. In terms of channel access and advantage against our competitors, we are overweight in Screwfix. So we have a very large market share of the Screwfix wiring accessory business. And we won some more business in Screwfix and in Kingfisher as a whole actually last year. So our sales out of Screwfix are currently running at north of 50% up on last year. Um, screw fix is also taking share in the market. Um, so that's a big advantage for us against our competitors in terms of overall market share, because we are, um, are the dominant provider to screw fix. Our competitors are not. Um, and yes, we expanded our ranges that we have with them last year. I mean, generally we are overweight those customers with a strong online and digital platform. And there are sort of historical reasons for that, but obviously we didn't think about it in the context of what would happen with a pandemic, but it has resulted in a channel shift, which has moved very much in our favor. In terms of your M&A question, we haven't seen valuations change a lot. I mean, the landscape, I don't think really has either changed that much. I mean, there was no M&A activity last year to speak of. Any processes we were involved in were on hold. The situation has now opened up a lot and there's quite a lot of activity that we are now involved in. But I don't think, you know, to answer your question about value racing specifically, I don't think that has changed. I mean, Matt, do you want to add to that?

I think I know. I think that's a great summary of M&A. I think just going back to the channel question, I think the key question for us and probably also for Screwfix was going to be, well, what would happen to their demand when the professional wholesale channel reopened in full? If you look at their quarterly growth rates, there has been no slowdown. In fact, there's been an acceleration. That's also true for us. And, you know, they've, I think, yesterday announced a further branch opening program in the UK market. So it seems like they're very confident that the customers that they picked up during the pandemic, and I know they announced yesterday 16% growth in customer numbers, up to 11 million in the UK now for Screwfix. You know, they are not expecting any switchback in customers from their channel back to a traditional wholesale channel. So I think the gains that they've made, I think they would say they overwhelmingly expect to keep. And of course, that's great for us.

Yeah, and it's not... I mean, also, Amazon is growing very strong with us. Toolstation, which has a very strong digital platform, is growing strong with us. And there are up to five other major customers of ours who have invested a lot in the online channel, and they are all outgrowing the market. So we got lucky, but... That was always going to happen. It just sort of happened earlier and happened quicker.

OK, that's really helpful. Thank you for that. Thank you.

As a reminder, to ask a question, please press star one. We will now take the next question from Christian Handeraker from Liberum.

Good morning, John, Matt. Thank you for the time. Can you expand a little bit perhaps on your comments around the new business wins and I think you touched on with Screwfix potentially with some detail around both product type and channel and then also looking ahead the areas where you see sources of organic growth along those two lines. And then my second question would be about the dynamics within your international businesses both in terms of growth but also margin contribution and how you expect that to impact sort of group profitability in the next few years.

OK, thanks, Christian. If I answer the business, I'll let Matt talk about international. Yeah, I mean, look, we won the Kingfisher wiring accessory tender, which. was an activity we've been working on for a couple of years. We were awarded the business last year. I mean, we already had quite a lot of it, but, you know, there were gaps where our competitors had wiring accessories within the sort of core range within Screwfix and B&Q. And... won that business so it implemented in screw fix towards the end of last year and it implements into bnq in the middle of this year it's quite a significant business win in a sort of high margin sort of core category and you know that's the most significant business win but we also have one business in toolstation Throughout last year, we won significant business, which will annualize into this year, both in terms of wiring accessories and in terms of lighting. We've also won lighting into retail. Other retail customers, I can mention Wilco's, I can mention Wick's. Like I mentioned, Argos even. So, you know, we do obviously have an ongoing process of winning every meaningful contract that we can. And the last year or so, we have been quite successful in that activity. Matt, do you want to talk about international?

Yeah. So just, Christy, in terms of the raw numbers, our international business represents 20% of our revenue. I mean, John gave the example of the LED cells within that specifically, but if you just look across all categories, they operate, I would say, pretty close to breakeven today. And I'm not promising that they are necessarily going to rise to the group average operating margin, I think. I mean, to be honest, it's taken us 70 years for the UK business to get to the margin that it delivers. These international businesses, let's not forget, they've been around for six, seven years. But I think it is reasonable to expect over time for them to get to double digit. And we certainly set a plan for each of them to do just that. I mean, the good news is that they've got the resources now. to um to sustain their rates of growth we don't necessarily have to put any more cost into those businesses they've got what they need they need to grow and i think with that we are confident they can get to at least a double digit um clearly if that's not possible then we'll then we'll think again um the the only um issue right now is that as we speak some of these markets have re-entered lockdown because of the third wave that's emerging in in Europe and that's not helpful. But once we're through that, we're confident we've got the plan to grow the profitability overseas.

Thank you and I'll get back in the queue.

Thanks. As there are currently no further questions on the phone, I'll now hand over to Rosie for any questions over the web.

There are no current questions over the web course, so I'm going to hand back to John and Matt for any closing remarks.

Yeah, well, just to say thank you very much to everybody for attending this morning. I would like to reiterate, I mean, last year was a fantastic year, but we do believe that this year can be even better. Matt, do you want to?

No, I'd say thank you everyone for joining the call and we will speak to you again at the half year. Thank you.