Luceco plc

Okay, well, good morning, everybody, and welcome to the LISICO 2022 final year results presentation given by myself and Matt. 2022 results were in line with the update that we gave earlier on this year in January with our revenues at... 206.3 and adjusted operating profit at the top of the range of 22 million. A more advantageous tax rate resulted in EPS of 11.1 pence. This reflects a normalization after the incredible year we had last year in 2021. There has been a slowdown in the residential PMI sector, and as we know, In 2022, we had a significant headwind from the overstocking that occurred in the previous year. But our results remain well ahead of the pre-pandemic levels of 2019. Our revenue is up over 20%. adjusted operating profit up over 22% and adjusted EPS up over 44%. We have gained share in attractive markets during that time. And with that, I shall hand over to Matt. Oh, no, I've got another slide. Yeah, so the year started with a lockdown still that drove higher than normal volumes. But as we got into the second half, there was a slowdown in the residential RMI and also customers accelerated their de-stocking. In total, we think the overstocking was valued at about £25 million. So it had a huge impact on the results in 2021 and 2022. However, last year we had extremely strong generation of cash and we ended the year with a much healthier balance sheet. The outlook for this year so far, we are trading in line with expectations, higher margins as a result of lower input costs that I'll talk about more later. Customer destocking has mostly worked its way through and the gross margin is improving. But as I say, a slower RMI market, particularly in the residential sector. As we get through the year, our comparators get easier because the first half of last year was relatively stronger against the second half. And with that, I will hand over to Matt.

All right. Thank you, John. Morning, everyone. So let me just start by pulling out some of the key themes within our numbers. So before I talk about the 2022 performance, I should just quickly remind you of how we entered that year. So 2022 obviously came on the back of an outstanding performance in 2021. In that year, the pandemic drove strong demand within the residential RMI market, particularly within the DIY sector. It also created significant supply chain disruption, and our customers responded to strong demand and uncertain supply by increasing their stock levels. This added to already strong demand for our products, resulting in 2021's exceptional sales and profit performance. Almost inevitably, we have fallen short of that record performance in 2022. As you can see in the red numbers on this page, we have seen a slowdown in underlying demand, particularly in the DIY sector, which drives about 30% of group revenue. The demand from other areas of the construction market has remained relatively robust. But the slowdown in underlying demand was not the biggest driver of our 2022 performance. The biggest driver is that our customers in the distribution channel have responded to slower demand and normalizing global supply chains by removing the extra inventory of our products that they bought in 2021. This has left our 2022 sales unusually but temporarily lower. I will talk more about that in a minute. This customary stocking explains all of the reduction in sales and profit versus 2021 that you can see on this page. And obviously, whilst it's naturally disappointing to fall short of 2021's record result, we must also try to look through this highly unusual pandemic period to assess the progress that we are making longer term. For this reason, I've added a pre-COVID 2019 comparator on this page. And as you can see from that comparator, despite giving back some ground in the year, we remained well ahead of 2019's performance across nearly every metric. We have taken share in our attractive markets, as John has said, using our advantage business model, which is very encouraging for the future. John will talk more about this later. So those are the key themes. And with that, I'll get into the numbers in a bit more detail. Okay, so reviewing the income statement, you can see that revenue came in at just over £206 million. That was 10% lower than 2021 due to customer destocking, but it remained 20% higher than pre-COVID levels. The combination of organic growth and M&A means that we have gained share in our most attractive markets during the pandemic. Gross margin for the year was 36%, and whilst this was lower than 2021 and lower than where we want to be long-term, we were very pleased with how our margins improved as the year progressed, thanks to proactive action on selling prices and a recent easing of input cost pressures. The gross margin performance was all the more impressive when one considers that customer destocking left our manufacturing overhead relatively underutilized, suggesting room for further margin upside as production volumes recover. Overheads were 52.3 million pounds with the majority of the increase year on year attributable to acquisitions and overheads therefore for the rest of the group increased only very slightly. Tight overhead control has been a key driver of recent improvements in our profitability, and we maintained our discipline in this area. Adjusted operating profit was £22 million at the top end of our previously guided range. Similar to revenue, customary stocking resulted in a reduction in profit versus 2021, but profit remains ahead of pre-pandemic 2019. Turning to tax, our tax rate has continually reduced over recent years, as we have taken advantage of various government incentives. We expected an effective tax rate of 15% for the year. We actually achieved a rate of 11.3% for the year, thanks to some one-off benefits. And that pushed our adjusted EPS up to 11.1p, which was slightly ahead of market expectations. OK, so this slide provides a bit more detail on the drivers of our revenue performance. So as I've mentioned, the biggest influence on our revenue performance year on year was not changes in end market demand, but rather how our customers in the distribution channel serving those end markets have chosen to flex their own inventory of our products in the highly unusual circumstances of the pandemic. This was particularly evident in the retail and hybrid channels because the business model of these distributors requires them to hold more inventory of our products than others. Plus, they did experience the largest change in end market demand because they serve the DIY market. I've got a slide on this later on. We also saw some professional wholesale customers buying stock ahead of price increases during 2021. The net result of this is that our largest customers stocked up by £27 million in 2021 and then stocked down by £20 million in 2022, thus creating a £47 million swing in revenue year over year. As can be seen in the top chart, destocking therefore explains all of the like-for-like decline in revenue we have seen. Needless to say, this means that the like-for-like revenue absent destocking, in other words, demand for our products from our end markets, was actually flat on last year. Put simply, underlying demand was better than what our headline numbers suggest. Despite the headwind of destocking in the year, you can see that our revenue remained well ahead of 2019 levels, thanks to both M&A and solid like-for-like growth. Within the increase in revenue since 2019, there has also been an important change in mix. Efforts over recent years to rebalance our revenue towards professionally installed products, particularly those installed in non-residential settings, allowed us to mitigate the slowdown in DIY that we've seen and also benefit as high energy prices drove strong demand for LED retrofitting. Okay, so this slide shows the key drivers of our profit performance. So overall, the story is again dominated by customer stock movements. I just referenced a £47 million like-for-like swing in revenue from customer stock movements. These movements largely impacted our high margin wiring accessory sales, meaning the profit impact from this revenue reduction was relatively high at £24 million. Despite this, as you can see, the like-for-like profit decline was limited to £17 million. So the question is why? Well, the reason is that we got some like-for-like profit growth from the full impact of selling price increases put in place during 2021 and 2022 to combat input cost inflation input costs rose sharply during the pandemic and even though we monitored these costs very closely and responded very proactively to them we did not fully recover all of the cost inflation that we faced in 2021 and that held back our profits in that year the gap has closed in 2022 adding about 8 million pounds to our profit Input cost inflation is now in reverse for us, at least, as the global economy calls, and I've got a slide on that in a minute. So given the way that customer destocking held back our profits in 2022 by about £10 million, in fact, our profitability will benefit as customer destocking comes to an end, helping to counterbalance the impact of weaker macro conditions. Okay. Now, so given how evidently important customer destocking was to our performance in 2022, I've chosen to show a detailed slide on it. So the graph summarizes two things. So firstly, inventory value, which is showed in the dark green. and also inventory cover, which is shown in the light green, as held by our largest retail and hybrid customers during the pandemic. These customers drove most of the destocking impact. In 2019, which is the far left-hand side of that chart, pre-COVID, you can see how relatively stable customer imagery levels were. In other words, customer stock movements are not normally a big influence on our performance. but the pandemic created an exception to that rule. In 2020, COVID-related supply chain disruption meant that our customers were actually unable to add inventory quickly enough to cover the strong lockdown demand from DIY that they are experiencing. And that meant that our customers started 2021 actually in an understocked position, as you can see from the light green chart. Customers therefore placed very large orders to correct this, increasing inventory levels very materially in 2021, as you can see in the dark green chart. Due to supply chain disruption, however, many of these orders arrived later than planned in late 2021 and early 2022. From the customer's perspective, their imagery cover at the end of 2021 seemed appropriate for the high level of demand that they were experiencing at the time. But demand had already begun to slow as the pandemic drew to a close. It slowed further in early 2022 as hostilities in Ukraine dented consumer spending. Thus, an understock in 2021 quickly turned into an overstock in 2022, and customers therefore started to destock in early 2022, and then very rapidly in the second half of that year, as you can see. As we sit here today, you can also see that this destocking phase is largely complete, with imagery cover largely back to pre-pandemic levels. We continue to estimate that the total impact of destocking on 2023 revenue will be circa £5 million. As you look at the imagery value movements in 2021 and 2022, you can see that they largely mirror each other, adding extra stock in 2021, boosting our sales, removing that extra stock in 2022, reducing our sales. So when trying to understand the normalised results for the group, absent these temporary stock movements, it is therefore not unreasonable to average the performance of both years, as shown in the bottom right-hand corner. Admittedly, this average does include 2021, a year in which our core residential RMI market was experiencing strong demand. But this strong demand also brought with it significant cost inflation that we had not fully passed through in that year, basically making it a year of above average activity but below average profitability. The two impacts actually broadly offset one another. So this does add some weight to the argument that the group can return to the average performance shown as market conditions allow. In summary, the impact of customary stocking has been unusual, it's been significant, masking our underlying progress, but the issue is now largely behind us. Okay, as I've said, whilst customary stocking inevitably left our results lower than 2021, we were encouraged by the underlying progress that we made, and certainly that underlying progress has improved as the year has progressed. As you saw in the previous slide, customers destocked more rapidly in the second half than the first. And there's also little doubt the conditions in the residential RMI market became tougher as the year went on. So therefore, profit in H2 should have been materially lower than H1. But it wasn't. The reason is because firstly, our gross margins improved from 34% in the first half to 38.1% in the second half. as we said that they would in fact, thanks to selling price increases and some cost deflation. And secondly, we saw improving demand from LED retrofits in the non-residential and infrastructure markets. This, for example, helped Kingfisher Lighting to deliver record profits, which John will touch on later. In summary, we ended 2022 with encouraging trading momentum, And this has continued into 2023. But of course, we remain cautiously optimistic given the very uncertain world that we continue to operate in. Okay, so this slide provides a quick update on input cost inflation. So the good news is that cost prices continue to move in our favor. This time last year, I said that pandemic and conflict-driven input cost inflation in all of its forms would add £25 million to our annual cost base. By the half year, my estimate had reduced to £21.5 million, as you can see. Now, you can see my latest estimate has reduced still further to £14 million. The biggest single reason for the reduction is freight. A year ago, we were looking at a £7 million cost increase in this category alone. And as you can see from the top chart, the on cost is now nil because sea container rates have returned to historic norms. We have also seen some welcome appreciation in the value of both the US dollar and sterling against the RMB, which is pretty important for us. And that has reduced our currency headwind. The only cost really that remains stubbornly high is copper, and the electrification of heating and transportation means that this may remain the case for some time. The good news is that as you can see from the bottom chart, to date we've experienced, in fact you can't very well see it on that chart, but it does say that you've experienced £18 million worth of cost inflation so far through to the end of 2022. meaning that at current prices we would see a £4 million cost deflation from here, creating a tailwind to profit, unless of course it's passed through. So through this period we have proven our ability to protect our margins from inflation by resetting prices as appropriate, which I think is a testament to the strength of our brands and to the strength of our service. Okay, so just finishing up on the numbers, this slide summarizes our working capital, cash flow, and debt performance. In short, we have guided, or we did guide, to lower inventory, strong cash generation, and lower leverage in the second half of the year, and that indeed is what we've delivered. As you can see in the top left, shorter delivery lead times out of China have allowed us to remove the buffer inventory that we added during COVID without impacting customer service levels. Converting this buffer inventory into cash, whilst also improving our cash collection from customers, drove record cash flow in H2, as you can see in the bottom chart. This has transformed our balance sheet, with leverage reducing to 0.8 times EBITDA by year end, thus creating options that we simply didn't have six months ago. Four-year free cash flow amounted to nearly £31 million, which is equal to a free cash flow margin of very nearly 15%. As you know, we guide to an average margin of at least 10% through the cycle. So this was a very strong performance and driven by, of course, that removal of the buffer stock. We will inevitably see some normalization of this margin in 2023. With that, I will hand you back to John to talk through the business review and the outlook.

Thanks, Matt, for that excellent summary. And I'd like to take this opportunity to thank you very much for all your extraordinary hard work and accomplishment over the last five years. And on behalf of everyone, to wish you the very best in the future. I'm sure you'll have a fantastic career. As Matt says, the pandemic had a huge impact on our numbers. But in the meantime, we have made excellent progress on many of the important aspects of our business. Firstly, I'd like to talk about why our business will grow faster than the market over the longer term. And we point to four main issues. First, the regulatory change, new technology, ongoing investment in commercial buildings, infrastructure and the residential sector, and investments are needed to impact on the climate change. Starting with regulation, the electrical insulation market is highly regulated. In the UK, for example, every two years there are various changes across lots of different categories. This will drive product replacement and it also increases the selling costs as for new regulations nearly always result in more sophisticated and thus more expensive products. An example of this is the fuse board category, which we entered approximately 15 years ago. But over the last 10 years, improved safety in these products has resulted in the average selling price increasing by over 110%. That's over and above the cost of inflation. And hence, this is a significant tailwind on the revenue for us. Moving on to new technology. I give an example here of a plastic socket of which we sell about five million every year. We used to sell a simple plastic socket for approximately one pound, but as we've added more and more functionality, and the latest thing is USB-A, USB-C, and actually I've got an example of a sort of higher added value socket here, we've managed to increase the selling price by over 800%. This has obviously had a huge impact on our revenue and our margin. In the built environment, UK house prices have risen by approximately 6% on average since the year 2000, which has supported ongoing residential RMI investment which has grown by approximately 4% per annum over the same period, significantly faster than GDP. People want to invest in an appreciating asset and they need to do so as the housing stock in the UK continues to age. So both of these support a long-term growth in demand for our products. And finally, climate change, as Matt mentioned earlier, the electrification of heating and also transport will drive a big increase in the amount of electricity demanded in individual households, which will result in more demand for products like ours. And as you know, we made a big investment into the EV market, and I'll go on to talk about more of that in a minute. You can see how this has impacted our recent growth. We compare back to the pre-pandemic period our earnings. and our revenue have massively outstripped the growth of UK GDP. And you can see on the right-hand side how we have improved our customer exposure and mix. In the last downturn, we were mainly focused on the residential RMI and consumer sectors, But we now have an infrastructure business and a projects business, which is counter-cyclical often. And in the bottom left, you can see lots of further potential to move into other product areas, like we've done with EV charging. So Kingfisher is an example of a business that we bought in 2017. At the time of acquisition, it was turning over approximately 12 million, and it was making EBITDA of 1.3. Since we've owned it, we've invested in the product range, we've invested in the management team, we've invested in the commercial operation, and we have more than doubled the EBITDA. This is a specialist outdoor lighting business which is focused on infrastructure projects, lots of government work, and is therefore counter-cyclical. And this year should have revenue of approaching $20 million. So we bought it for 9.8 million in 2017, which was 7.5 times EBITDA. However, after the growth and the synergies that we have achieved, that reduced to a multiple of only 3.3 times. And we think we can do something very similar with the acquisition that we made last year of DW Windsor, It's a very similar business, a sort of niche, outdoor, specified, a professional customer. We deal with all the large contractors on projects such as HS2. And with the same strategy that we apply to this business, we think that business has a great future. We bought in 2022 a small EV charging business called Sync EV, but this gets us into an extremely exciting part of the market. As we know, by 2030, you will have to be buying a hybrid or a fully electric car, and these will all be charged at home. It is much cheaper, it is much easier to charge at home. The demand for home chargers is therefore enormous, and we can forecast the growth of it here. The market has actually been underperforming estimates because of the shortage of chips and because of the shortage of cars, but our business is performing as expected. We have approximately a 4% market share, which we are confident we can grow, and as the market grows, we think we can build a successful business in this category. Lots of product development. Since we've owned it, we have moved the production in-house. We're using the commercial teams that we have existing in the business, existing warehouse. The whole business is completely integrated, and there's lots of product development coming. This is a very exciting opportunity. Innovation has always been an enormously important part of our business. We have approximately 100 engineers working on new product development. A lot of work at the moment on DW Windsor, as I talked about, commercial EV, the green home opportunity, inverters, possibly solar panels. Obviously, we wouldn't make them, but the whole infrastructure that goes around having them connected into your home is an area that we believe we can get involved in, including three-phase supply. This is an interesting example of a new product range that we launched the back end of last year, relatively low investment because it's on a platform approach with the other wiring accessories. But we're very pleased with the market response. It's a slightly more sophisticated product than you often see in the UK market where you clip on a front plate in lots of different finishes. very high margin and we are hoping for very high sales. This year we should do sort of one to two million, but I think in future we can do significantly more. Sustaining our long-term progress Obviously investment in lots of customer engagement, particularly trying to get beyond the wholesaler to have strong relationships with the contractor base. So lots of training we have been doing with contractors, understanding how to use our products. On the climate side, we were operationally carbon neutral last year, and we had the lowest carbon density of any of the operators in our sector, as you can see on the chart on the top right. And we gave a generous pay rise to our people, 7.5% on average, but the lowest paid receiving over 10%. Onto outlook. Recent market trends. Residential DIY, as expected, is weaker, obviously a lot weaker than the lockdown boom of 2021, but not as weak as we might have feared last autumn when it looked like interest rates were going to go significantly higher. But still, house building is weak. Housing transactions are weak. These things ultimately drive demand for our products. But as I say, not as weak as we might have feared. On the plus side... The infrastructure and the non-residential side of the business has actually been quite strong. High energy prices feed well into LED retrofits. So return on investment for investing in highly efficient LED lighting obviously is a function of the energy price and is now highly attractive. Trading in line with expectations, as we said, as Matt pointed out earlier, normally our second half is significantly stronger than our first half. That didn't happen last year. Last year we had a strong first half. Customer destocking really accelerated in the second half. So the first half comparator for this year is therefore quite tough. But as we get through the year, that will improve. We definitely expect to have a stronger second half than first half, which has always been the case in our business. Customer destocking has almost run its course. The gross margin we exited last year was a 38% gross margin, significantly higher than the average for the year. And that has continued into this year. And with the falling freight rates, if anything, that might edge a little bit higher. But as we say, there is the overhang of the macro-slower residential RMI. And with that, I think we'll take any questions.

Morning. It's Kevin Fogarty from Numis. Could I just kick off with two, please? Just starting with the stocking headwinds and what you've seen there. I just wondered if you could comment on how is your kind of visibility over customer inventory levels changed throughout this whole process? And, you know, are you more confident in terms of what you can sort of call, I guess, for the year ahead in terms of the level of destocking? And sort of adding on to that, I guess, do you think sort of destocking will feature throughout 2023? Or is there a period where you think it'll have worked through from that perspective? And just secondly, in terms of working capital, clearly a big performance given the buffer stock coming down. But I guess the outlook, what does that mean for your need now to sort of invest in inventories as you move through this year, given what you can see currently?

So, Kevin, thanks for the question. So, destocking. I think our visibility generally of customer stock levels has undoubtedly improved during this whole sort of 18-month period. And in terms of what are our customers trying to achieve, it feels like they are trying to get back to where they were before the pandemic came along. No more, no less. So recognizing that, we kind of know how this story ends. The only thing that could really change it is if there's a further step down in underlying activity. more than we're expecting, put it that way. So say for that, we think we know where this ends up. In terms of the phasing, based on our projections, they should be able to deal with the remaining 5 million in the first half. On working capital, I'll answer it this way. There was nothing temporary about the cash that we delivered in 2022. So we've seen no reversal in working capital in early 2023. If anything, the debt has slightly reduced since then. In terms of what do I expect for 2023, Ultimately, I mean, certainly if you look at the numbers that are out there in the market, I'll put it that way, I think the market is expecting the tailwind that we get from the end of destocking to be offset by a slowdown in residential RMI, leaving our volumes pretty flat. If that's the case, working capital should be flat.

Perfect. Thanks for the clarity. Thank you. I'll just add, Kevin, on the stock inventory issue, It wasn't just our customers who got it wrong. I mean, we got it wrong as well. And there is some excess inventory in certain areas. I mean, we've, you know, last year we reduced it quite a lot. but we should be able to reduce it further this year. So I think cash generation should be a little bit better than the average. But as Matt says, actually, if you look at the numbers, 2021, we made an incredible profit, but actually our cash generation was very poor. That reversed in 2022. Right.

Understood. Thank you. Thanks.

thanks very much uh charlie campbell at liberum um a couple from me as well sort of um just thinking about selling prices uh clearly i guess your customers must be aware that of what the movements and freight rates as well so so how how how hard or easy will it be to hold on to selling prices this year given uh the input cost um unwind and the second question is just on on the ev charger segment so you've moved manufacturing to china Just wondering kind of how much capacity you've got there. And also, if we look at the UK sort of charger market, are your competitors also manufacturing in China or not? And if not, does that give you a significant cost advantage over them?

Yeah, do you want to take the first one and I'll... Yeah, so I think, yeah, obviously, as you say, customers will be aware of what's happening to container rates. You know, many of them are importing in the same way that we are. I think there are some things that go the other way, though. As an industry, I think the overall manufacturing base supplying our marketplace, they will all be experiencing lots of Western wage inflation. They will also be experiencing a relatively weak sterling. Those things impact us a little bit less, I have to say, for various different reasons, right? So I think if you look at the industry, I think the industry will be trying to hold on to the pricing that it's already got because it knows there's still some inflation to come. And we will follow whatever the industry does on selling prices. At the same time, of course, we won't do anything that prejudices our commercial and competitive positioning, right? So I think you can expect that in our most price-sensitive lines, so portable power in particular, it's likely that we may have to give some ground. But I don't think it would be significant giving.

Yeah, and I'll just, I mean, I can add to that. I mean, there's a technical point, which is that those customers who have power to negotiate prices generally buy FOB. So there is actually no freight element in their costings, right? All the Kingfishers and the Travis and all those guys. Smaller customers who buy non-FOB don't actually negotiate prices. It's a market price. If the whole market moves, we will obviously need to move with that. We've not seen that happen yet at all. In fact, some of our competitors have been putting up prices. I don't worry too much about that. I think maybe later on in the year we can edge our prices. The second question about EV. Our competitors generally don't make in China. One or two of them do. The largest operator in the UK residential market, which is a listed business, I think manufactures in Eastern Europe. Lots of Swedish and Scandinavian entrants, because they were ahead of the curve, are generally manufacturing in that part of the world. We do have a competitive product. You asked about factory capacity. I mean, I didn't talk about this, but we've done a huge amount of work in the factory over the last three years. I've actually been there twice in the last six weeks, having not been able to go there for three and a half years. And I think that will make a real difference to our business, actually. I mean, our UK product guys have been out of China for a very long time, and I think that's had an impact. But we've done a lot of work to improve the productivity, the efficiency and therefore the space utilization in our factory. And I would say at this point, it's probably only 50% occupied. So there will be no capacity concerns for the foreseeable future. And I think Chinese manufacturing does give us a significant cost advantage. I mean, we are making very strong margins on the EV category, unlike others. The operating margin as you can see we're reporting 18.5, and it's a subscale business so as it grows I think the contribution margin rather, but you know should be north of 20 We're using existing commercial teams. We're using existing warehouses. We're using existing everything And therefore it's highly margin accretive And we were actually modeling Over time, heading prices of this category would come down as it became more competitive, as there were more new entrants. But actually, we haven't seen that. It's relatively short. We've only been in it a year and a half. The market prices are holding up, if anything are increasing. Lots of regulatory additional requirements have come into this product category, which has increased selling prices.

David Larkin from Edison. Firstly, can you just talk a bit about the UK housing new build market and your exposure there? And then secondly, we've obviously focused on the UK market. That's cool. But just update us on the overseas and your thinkings and what's going on there.

Yeah, I mean, I think our total exposure to UK housing is approximately £10 million. That is spread across various different businesses, including DW Windsor that we bought recently because they will be doing the streetlights on the housing development. And everyone reads what's been happening in that sector. I mean, it is worth noting that we are one of the last things to happen on a house which is built. Our products probably go in eight to nine months after the housing construction has started. So we would expect to be seeing a slowdown in that probably now. And we've definitely budgeted for that. So we'll have to see. In terms of overseas, we have a business in the Middle East which is doing very well. High energy prices have been benefiting our lighting projects businesses generally. And most of our overseas business are focused on lighting projects. So our business out of Dubai, we also have a business in Mexico, which is performing very strongly. We have a business in Spain, which is doing okay. But overall, we are still at 80% UK business. And I think without significant M&A activity, that will remain the case. One thing we haven't spoken about is the China plus one question. Concern over our Manufacturing concentration in one territory may lead us to look at acquiring diversified manufacturing outside of China with a revenue stream, probably. And if we made a significant move, then that would reduce our UK exposure.

Actually, just following on from that, so why would you... Why would you acquire rather than you build in, say, Vietnam or Malaysia or somewhere like that as a startup? And then, anyway, coming on to sort of longer-term stuff, you've done some analysis here, effectively sort of thinking about normalized earnings and those sorts of things. Could you talk a bit, but on the other hand, if I take the two years that you've got here on slide 10, you've got an operating margin of 10% in one year and 17% in another. So quite a wide range if one's thinking about taking an average as normalization. Can you give some sort of thoughts as to do you think gross margins in wiring can sit at 50%? Is that too high? What do you think operating margins? This is in a long-term view when things are stable. Operating margin, what sort of level do you have in mind for those?

I mean, if you went to our factory, you would see why you would buy something rather than build something. I mean, it's taken us 12 years to build that. The level of expertise in manufacturing that we have now takes some time. I mean, if you could move that expertise somewhere else in Asia. I mean, Vietnam is a province of China, effectively. Malaysia is not that cheap. But I think the idea for us is not to move manufacturing out of China with a green field. I think the idea for us is to have a lifeboat, have a capability elsewhere, that if we needed to move manufacturing out of China in a hurry, we could do so. So acquiring expertise which is already in the market manufacturing, maybe with some excess capacity. And we could tool some products there. But China, and we've done a lot of work on this, is still the cheapest place in the world to manufacture by quite a long way. And we have a fantastic team there. We've invested a lot of money there. We have a great operation there. Our plan is, as I say, not to... make that factory any more underutilized than it is already. It would be more to accelerate diversification if we had to. I mean, I personally don't believe we will have to. But having a lifeboat to jump into, I think, is a sensible risk mitigant. I mean, I'll just say something quickly about margins, then Matt can maybe say something more. Wiring accessories at 50%, no. Wiring accessories is a 40% to 45%. I mean, operating margins, if you average the three years, actually, 20, 21, 22, of around 15%. I think a through-the-cycle average at that level is achievable. 2022 is an anomaly, obviously, as is 2021. 2020, we achieved 17%. And actually, I thought that if the pandemic hadn't hit us in 2020, we would have probably made a higher operating profit than we did, maybe on a higher revenue line. But I think gross margins between 38 to 40 on a normalized volume would lead to operating margins of around 15. But that is... is the benign, normalised macro environment, which we might not have for a couple of years. Matt.

Well, I think you've taken the words right out of my mouth, really. Yeah, I mean, as John says, I mean, you've picked two years. I prefer to look at three, 17%, 17%, 11%. And the reasons for the 11%, as you can see from the charts I've shown, is really quite unusual. And given that we've achieved that in more than 15% in two of the last three years, one has to ask the question, well, what has changed such that we couldn't achieve that again? We've passed through all the cost inflation that's out there to pass through. The nature of the business hasn't fundamentally changed. I believe this business is a 40% gross margin, 25% overheads, 15% net margin kind of business. That's what we were on course to achieve and did achieve. As John says, not reasonable or prudent to expect that in the near term until such time as we all know where the world is heading and whether we're going to have a 2008 all over again.

I mean, Matt touched on this earlier. I mean, 2021, yes, we had very high volumes, particularly wiring accessories, particularly made in our own factory, and that's very good for operating margin. We also had a huge amount of inflation. And our gross margin, particularly in the second half of 2021, was well below where... it is now and where it can be normally because of the time lag to get a price increase into those major customers. It took us almost a year to get a price increase into the likes of Kingfisher by the time they worked through their supply chain of stock and FAB orders, et cetera. So I think we've demonstrated that we are able to pass on inflation. Our brands, our service, as Matt said, allow us to do that. So I think 2021 with a normalized volume and a normalized margin, the operating margin would have been at around the 15% level. And that was relatively normal market demand. So anyway, long-winded answer to your question.

I had a quick follow-up, if I may. Within that, if I look at LED, so last year, a gross margin of 45 or something. Sorry, last year, 45 in the project business. Let's assume that Kingfisher and DW is more or less there. An overall margin of 25, and let's say half the business is project and half isn't, suggests that the gross margin in LED lighting outside of the project business is de minimis. Is that right?

Andrew, I'm not sure where the 25% overall comes from, to be honest with you.

I'm talking about gross margins. Yeah, okay.

What was it overall? We don't publish that.

Andrew, I'm not sure how you get there, but I can tell you the numbers. I mean, project gross margins, LED is about 50%. residential RMI, more consumer sort of B&Q type LED is near a 30 to 35%. So yes, there is a big difference. The cost to serve though, you know, you have to win every project individually, you have to do a lighting design. There's a lot of work on implementing these projects and executing them. I mean, Kingfisher, Last year, I think, made a 13.5% operating margin. And I think it's on a path to 15%. Some of our listed competitors in this space make an operating margin north of 15%. So project lighting is a good business. You're right that non-project lighting is not such a good business. But we use the same commercial teams. We use the same infrastructure across the group to supply that, to supply the non-project channels. So if you take everything into account, the returns are still good.

Yeah, just to expand on that. So the project lighting business that we bought five years ago is doing great. The project lighting business that we just bought will do great. The project lighting, the Luceco project lighting business that we bolted onto our UK business is doing great, contributing well because it's sharing an existing overhead fundamentally. The bit that needs to do perhaps a little better is the overseas part of the equation for me. So still a bit more that we can do to mature those businesses and generate a little bit higher margin.

Because they're subscale. I mean, they're only five years old, those businesses. And it obviously takes time to build a presence, build a brand, and build a margin. Thank you very much.

As it looks like there are no further questions in the room, we've had several submitted online, the first of which from Mark Simpson at Excellent Investing. What sort of financial capacity do you see for further acquisitions? And what is the acquisition landscape looking like in terms of opportunities and pricing?

Thank you for the question. I mean, our capital policy is one to two times leverage. We're 0.8 currently. We'll be de-gearing as the year goes on. So you can do the maths. I mean, depending on how much EBITDA we can buy with the numbers. I mean, I think... We might want to see the macro a little bit more stable. But certainly, if a good deal came along, we'd be very happy to execute on it now. In terms of opportunities, we get to look at lots of stuff. I think we're going to run a process to look at the China Plus One activity that I talked about earlier. I think that's an important strategic step for the group. Yeah, we look at stuff all the time, but we're not in a hurry, and hopefully we can do another accident deal later on, maybe this year or early next. Matt, do you want to?

No, I think that's good.

The next question comes from Florence O'Donoghue at Davey. Can you tell us a bit more about how the DW Windsor business has performed?

Yes, I mean, the first year of ownership, to be honest, was a little disappointing. They had some long-term contracts, which they didn't have inflation caveats in them, so the margin got under pressure. This year will be better. We're doing a lot of work on the product range, as we did with Kingfisher, a lot of work integrating it with the group sourcing activity and the manufacturing activity. Just by re-engineering products, redesigning, resourcing, we have managed to make significant savings on the cost of sales line, which is an ongoing activity. So I think the future for that business will be strong. It obviously takes a little bit of time to properly integrate it.

The final question from Mark Simpson at Excellent Investing. Motor dealers are reporting secondhand electric car sales are weaker as higher electricity prices and lower fuel prices erode the running cost advantage. Are you seeing any impact of this on SYNC EV?

Yes. Yes, I mean, the market for EVs has underperformed what was being estimated a couple of years ago. And that's definitely having an impact. I mean, we don't necessarily view that as a negative. I mean, we've had a lot of work to do on the product range, on really understanding the market dynamics, on integrating this with the rest of our operations. So the slightly slower market has actually given us space and opportunity to do that. And electricity prices, as everyone knows, have been very elevated. That probably doesn't last forever. And we believe in the future of electric vehicles. And unless the government change their plans by 2030, every new car sold will need to be plugged in at home.

Just to expand on that, we should obviously define slightly slower. Slightly slower still means extremely rapid growth in demand for EVs and therefore EV chargers. So just a little bit slower than we thought initially, but helpful, as John has said.

Thank you. As there are no further questions online, I'd like to hand back for any additional or closing remarks.

Well, Matt, why don't you have the final word, given that it is the final word?

I think it's hasta la vista, baby, I think is what people say in these situations. So thank you all for coming. It's obviously a pleasure to see you all in person, at least in this kind of setting, for the first time in a number of years. And also thanks to everyone who's dialed in virtually as well. So with that, I bid you all bonjour.