Luceco (LSE:LUCE) — Final Results

0:00 Good morning, and welcome to the LUCECO PLC final results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated on the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll, And I'd now like to hand over to John Hornby, CEO.

0:32 Good morning, sir. Thank you very much, and good morning, the listeners. And thank you for your time in attending the LUCECO twenty twenty two results presentation this morning. These results were in line with the January trading statement, operating profit of exactly GBP 22,000,000 on revenues of GBP $2.00 6,000,000, resulting in EPS of GBP 11.1. This result is normalization after an extraordinary strong year that we had in the pandemic in 2021. And Matt will go on to talk more about this. But as we know, our customers overstock themselves in that period. And since then, there's been a slowdown in the residential RMI demand.

1:19 However, against the pre pandemic period of 2019, the results have been excellent. The revenue up over 20%, operating profit up over 20%, and adjusted EPS up over 44%. And we have gained share in the attractive markets in which we operate. As I said earlier, we have experienced a slowdown as we would expect. However, customer destocking is nearing completion and therefore our revenue stream this year should be more normal. And our gross margins are improving considerably. Matt will speak more about that.

2:04 And our cash generation in the second half of last year was extremely strong, resulting in a very healthy balance sheet. Outlook for 2023, so far, we are trading in line with our expectations. Our customer destocking, as I said, has been less this year than last year. Our gross margin is improving as input costs continue to fall, but the slower residential market is resulting in weaker end user demand. But the comparatives get easier as the year goes on. With that, I'll hand over to Matt. Okay. Thank you, John. Morning to everybody. Pleasure to be back on the platform. So let me just start by pulling out some of the key themes within our numbers before I get into the numbers in detail.

2:54 So before I talk about 2022, I should just quickly remind you of how we entered that year. So 2022 came on the back of an outstanding performance, as John has said, in 2021. In that year, the pandemic drove strong demand within the residential RMI market and particularly within the DIY part of that. It also created significant supply chain disruption. Our customers responded to strong demand and uncertain supply by increasing their start levels. This added to already strong demand for our products, resulting in twenty twenty one's exceptional sales and profit performance. Almost inevitably, we've fallen short of that record performance in 2022, as you can see in the red numbers on this page.

3:40 We've seen a slowdown in underlying demand, particularly within that DIY sector, which drives about a third of group revenue. But demand from other areas of the construction market have actually 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 supply chains by removing that extra inventory of our products that they bought in 2021, and this left our 2022 sales unusually but temporarily lower. I will talk more about this in a minute. So this customer destocking explains all of the reduction in sales and profit versus 2021 that you can see on this page.

4:29 And whilst it's naturally disappointing to fall short of twenty twenty one's record result, we must also try to look through the highly unusual pandemic period to assess the progress that we're making longer term. For this reason, I've added a pre COVID twenty nineteen comparator on this page. As you can see, despite giving back some ground in the year, we have remained well ahead of twenty nineteen's performance across nearly every metric. We have taken share in our attractive markets using our advantaged business model, which is very encouraging for the future, and John will spend some time on this later. So those are the key themes. And with that, I will 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 $2.00 £6,000,000 as John said.

5:20 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 and A means that we have gained share in our most attractive markets during the pandemic. Gross margin for the year was 36%, whilst lower than 2021 and lower than really where we want to be longer term, we were very pleased with how our margins improved as the year progressed, thanks to proactive action on selling prices and recent easing of input cost inflation. This 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 volumes recover.

6:11 Overheads came in at GBP 52,300,000 with the majority of the increase year over year attributable to acquisitions. Overheads for the rest of the group increased only slightly. Tight overhead control has been a key driver of recent improvements in our profitability, and we maintain that discipline in the year. Adjusted operating profit was then £22,000,000 at the top end of our previously guided range. And similar to revenue, customer destocking resulted in that reduction in profit versus 2021, but the profit does remain well ahead of pre pandemic twenty nineteen. Turning to tax. Our tax rate has continually reduced over recent years as we've taken appropriate advantage of various government incentives.

6:56 We expected an effective tax rate of about 15% for this year. Actually, we achieved a rate of 11.3%, thanks to some one off benefits, and that pushed our adjusted EPS up to 11.1 p, which was slightly ahead of market expectations. Okay. So this slide provides a bit more detail on the drivers of our revenue performance. As I mentioned, the biggest influence on our revenue performance year over 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 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 imagery of our products.

7:51 Plus, also, they did experience the largest change in end user demand as DIY activity normalized post pandemic. I've got a slide on this later on. We also saw some professional wholesale customers buying stock ahead of price increases in 2021. The net result is that our largest customers stocked up by £27,000,000 in 2021 and then stocked down by £20,000,000 in 2022, thus creating a £47,000,000 swing in revenue year over year. As can be seen from the top chart, destocking therefore explains all of the like for like decline in revenue we've seen.

8:38 Needless to say, this means that like for like revenue absent destocking, in other words, demand for our products from our end markets, was 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 and A and like for like growth. Within this increase in revenue since 2019, there has been an important change in mix. Efforts over recent years to rebalance our revenue toward professionally installed products, particularly those installed in nonresidential settings, has allowed us to mitigate the slowdown in DIY and also benefit as high energy prices drove strong demand for commercial LED retrofitting.

9:33 Okay. So this slide shows the drivers of our profit performance. So overall, the story, once again, is dominated by customer stock movements. I just referenced a GBP 47,000,000 like for like swing in revenue from customer stock movements. These movements largely impacted our high margin wiring accessory sales, meaning the profit impact of the revenue reduction was pretty high at £24,000,000 Despite this, you can see that the like for like profit decline was limited to £17,000,000 in the top chart. So why is this? Well, the reason is that we got some like for like profit growth from the full impact of selling price increases that we put in place during 2021 and 2022 to combat input cost inflation.

10:22 Input costs rose sharply during the pandemic. Even though we monitored these costs very closely and I believe responded as proactively as possible to them, we did not fully recover all of the cost inflation that we faced in 2021, meaning our profit was held back slightly in that year. This gap closed in 2022 as we expected, and that added about £8,000,000 to our profit. Input cost inflation is now in reverse, at least for us, as the global economy calls, and I've got a slide on that in a moment. Given the way that customer destocking held back profits in 2022 by about £10,000,000, in fact, our profitability will benefit as customer destocking comes to an end, helping to counterbalance the impact of weaker macro conditions.

11:17 Okay. So given how evidently important customer destocking was to our performance in 2022, I've shown a detailed slide on it here. The graph summarizes inventory value, which is shown in the dark green, and also inventory cover, I. E, inventory relative to demand, which is shown in the light green. And this is as held by our largest retail and hybrid customers during the pandemic. These customers drove most of our destocking impact. In 2019, which is over the far left hand side of the chart, you can see pre COVID, how stable customer inventory levels were. In other words, customer stock movements are not normally a big driver of outperformance, but the pandemic created an exception to that rule.

12:05 In 2020, COVID related supply chain disruption meant that customers were unable to add inventory quickly enough to cover the strong lockdown DIY demand, meaning our customers started 2021 in an understocked position, as you can see from the light green bar. Customers placed very large orders to correct this, increasing inventory levels very materially in 2021, as you can see in the dark green line. Due to supply chain disruption, many of these orders unfortunately arrived a little bit later than planned in late twenty twenty one and early twenty twenty two. From the customer's perspective, their inventory cover at the end of twenty twenty one seemed appropriate for the high demand that they were experiencing at that time. But unfortunately, demand had already begun to slow as the pandemic drew to a close, and it slowed further inevitably in early twenty twenty one as hostilities in Ukraine dented consumer spending.

13:09 Thus, an understock in 2021 quickly turned into an unexpected overstock in 2022, and customers therefore started to destock in early twenty twenty two. And as you can see, particularly rapidly in the second half of that year. 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 GBP 5,000,000. As you look at the inventory value movements in 2021 and 2022, you can see that they largely mirror each other, adding extra stock in 2021, increasing our sales, removing that extra stock in 2022, reducing our sales.

14:02 When trying to understand the normalized results for the group absent these temporary stock payments, it is therefore not unreasonable to average the performance of both years as I've shown in the bottom right. Now admittedly,

14:17 that 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, as I referenced earlier, making it basically a year of above average activity but below average profitability. The two impacts broadly offset one another. This adds some weight to the argument that the group can return to the average performance shown, of course, as macro conditions allow. In summary, the impact of customers destocking has been unusual. It's been significant, and it's masked our underlying performance, but the issue is now largely behind us.

15:07 Okay. As I said, whilst customer destocking inevitably left our results lower than 2021, we were encouraged by our underlying progress, which improved as the year progressed. As you saw in the previous slide, customers destocked more rapidly in the second half, and there's also little doubt that conditions in the residential RMI market became tougher as the year went on. Therefore, profit in H2 really should have been materially lower than H1, but it wasn't. So why is Well, there are two reasons. Firstly, our gross margins, as you can see, improved from 34% in the first half to 38.1% in the second half, as in fact, we said they would, thanks to selling price increases and some cost deflation.

15:56 Secondly, we saw improving demand for LED retrofits into nonresidential and infrastructure markets. This, for example, helped Kingfisher Lighting, one of our companies, to deliver record profits, and John will talk about that later. In summary, we ended 2022 with encouraging trading momentum, and this has continued into early twenty twenty three. But of course, we remain cautiously optimistic given the very uncertain world that we are all operating in.

16:31 Okay. So this slide provides a quick update on input cost inflation. The good news is that cost prices continue to move in our favor. So this time last year, I said that pandemic and conflict driven input cost inflation in all of its forms would add approximately £25,000,000 to our annual cost base. By the half year, my estimate had reduced to £21,500,000 Now you can see my estimate has reduced estimate has reduced still further to £14,000,000. The biggest single reason for the reduction is freight. A year ago, we were looking at a £7,000,000 cost increase from that category alone. As you can see in the top chart, the on cost is now nil because sea container rates have returned to historic norms.

17:20 We've also seen some welcome appreciation in the value of the US dollar and sterling versus RMB, reducing the currency headwind. The only cost 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 in the bottom chart, to date, we have experienced nearly £18,000,000 worth of cost inflation, meaning that at current prices, we would see a £4,000,000 cost deflation from here, creating a tailwind to profit unless, of course, pass through. So through this period, we have proven our ability, I believe, to protect our margins from inflation by resetting selling prices as appropriate, which I think is a testament to the strength of our brands and our service.

18:13 Okay. So just finishing up on the numbers. This slide provides a or a summarization, should I say, working capital, cash flow and debt. In short, we guided to lower inventory, strong cash generation and lower leverage in the second half, and that is indeed what we delivered. So as shown 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, as you can see, improving our cash collection from customers, drove record cash flow in the second half, as you can see in the bottom chart.

18:59 This transformed our balance sheet with leveraging reducing to 0.8 times EBITDA by the year end, and that has created options that we simply didn't have six months ago. Full year free cash flow amounted to nearly £31,000,000 equal to a free cash flow margin of nearly 15%. You may know that we guide to average margin of at least 10% through the cycle. So this was undoubtedly a very strong performance and, of course, helped by the removal of that buffer stock. We will inevitably see some normalization of that margin in 2023. And with that, I will hand you back to John. Thank you, Matt. So as you can see, the pandemic had a huge impact on our performance and our numbers.

19:50 But in the background and in the meantime, we have been making excellent progress on our strategy, which is to grow in a sustainable way by innovation. So I will go through now some of the long term drivers of our market growth. The first is regulatory change, and then I'll talk about new technology, investment in the built environment, and the climate emergency. Starting with regulation, the electrical installation market is highly regulated. In The UK, regulatory change happens approximately every two years across our various different categories. And this obviously drives product replacement. But it also increases the average selling prices of our products as the new regulations that always result in a more expensive product functionality.

20:47 An example of this that we show on the slide in the top left is in the fuse board category. New regulations over the last ten years have resulted in a 110% growth in the average selling price of these products and hence significant revenue growth for our business. So moving on to new technology. As you can see in the right hand side sorry. In the top right, we used to sell millions and millions of plastic sockets that we would sell for approximately one pound. We now sell much more sophisticated USB a, USB c sockets in lots of different finishes with an average selling price increase of over 800%.

21:45 This is obviously driven both our revenue and our margins significantly higher. In terms of the built environment, UK price prices have risen by approximately 6% on average since the year 2000, which has supported residential RMI investments. This has grown by approximately 4% over the same period, significantly faster than the overall growth or the GDP. People want to invest in appreciating assets, and they need to as The UK housing stock continues to age.

22:30 So both of these support the long term growth of the products that we sell. And finally, the climate emergency. This is a huge challenge that will result in more electrification in the homes. And as we are market leaders in UK residential electrical products, we would therefore hope that our sales would increase as a result of this. So you can see on on this slide how these things have impacted our growth since 2019. UK GDP just over 10% and our growth almost doubled that and our earnings almost four times that.

23:20 And you can see in top right that we've also managed to diversify our customer base. We are now more focused on the professional channel, which has higher margins and the brands have more purchase and are stickier. And you can see in the bottom left hand hand corner that there is huge potential for us to move into other areas. The UK electrical wholesale market in which we are a major operator is worth over GBP 3,500,000,000.

23:59 So here is a case study of a business that we bought in 2017. We paid £9,800,000, which at the time was 7.5 times EBITDA, and the business at that point turned over 12,100,000. Well, last year, it turned over 17.7, and we increased EBITDA up from 1.3 to over 2,700,000. And this year, I think, will be even stronger than that. So how do we do this? Well, basically, we just integrated this business with our group r and d function and our group sourcing function.

24:46 We invested a lot in the product range, and we also pulled the manufacturing of their products into our own facilities. As a result, as you can see, we improved the gross margin by over six percentage points. And last year, we paid which I think will be an extremely important and relevant acquisition for our future. The EV charger market, which so every home with an EV charger sorry. Every home that has it every household with an EV will have an EV charger in the home. So the market for EVs has been slow recently for all the well publicized reasons.

25:37 But if the government sticked to their plan of only plug in cars by 2030, this is a market which will have to explode. And this is a product which is installed by our existing customer base and our existing end user, the small professional electrical contractor. So we currently have a 4% market share, which we are confident growing over the next coming years in a market which is set, as you can see from the graph in the top right, the growth of citrulline. So I strongly anticipate that in future years, this business will make a huge contribution to our overall performance.

26:25 We have a strong pipeline of new products. This has always been historically one of our major pillars of our growth performance. We have over a 100 engineers working on new products. And the current projects, as you can see in the bottom right, are the expansion and improvement of the DW Windsor range. This is a business that we bought last year. A huge expansion of the commercial EV offering and other areas where we believe we can participate in the green power evolution.

27:05 This is a is a good example of innovation. A new range of wiring accessories that we launched last year has been extremely well received by the market. It was uses it a common platform approach with our existing products. So the the development cost was only approximately a £100,000, but we expect huge additional sales in this high margin range in the future. And so these are further important pillars of harass. We have been investing a lot in the training of the smaller contractors by the LUCECO Academy.

27:57 We have become carbon neutral operationally in the year. As you can see from the graph in the top right, we have the lowest carbon density of any major operator in our sector. We also gave a significant pay rise last year of approximately 7.5% on average and over 10% for our lowest paid people. In terms of the outlook I touched on this before but looking at some of the indicators. So you can roughly split our revenue into these groups. The hardest hit so far is the residential DIY market, the likes of P and Q and those guys. They are having because because of the cost of living crisis, a hard time at present and our sales in this sector are down approximately 20%.

28:52 On the residential professional side, that is holding up stronger and our sales here are down approximately 5%. On the nonresidential and the infrastructure meanwhile, those parts of our group are actually performing very strongly. As Matt said earlier, the high cost of energy means that LED retrofits have a have a shorter return on investment period than than they did before. So these businesses are actually outperforming. So the overall outlook, as I said earlier, 2023 so far in line with expectations. There's a significant tailwind from less customer destocking and higher gross margins. And as the lower input costs that we experienced in the second half of twenty twenty two feed through our inventory and into sales, we'd expect gross margins to improve as the year goes on.

29:50 However, slower residential RMI demand is obviously a headwind, but the comparisons get easier as the year goes on. We are normally a second half weighted business. However, last year, we actually actually made more money in the first half than in the second half. But this year, I suspect that will return to a more normal pattern. And with that, I will hand over and take any questions any of you might have. John, Matt, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab, which is situated on the top right hand corner of your screen. But just for the company, take a few moments to review those questions submitted today. I'd like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard.

30:41 As you can see, we received a number of questions throughout today's presentation. And if I could just ask you to read out those questions and give responses where it's appropriate to do so, I'll pick up from you both at the end. Very good. Thank you, Alessandro. Right. So the first question here comes from Stephen. Thank you, Stephen. So why exactly was there an GBP 8,300,000 charge as a finance expense below operating profit level last year? Yes, good question. So part of it would have been our normal finance expense, I. E, the interest that we have to pay on our debt and our on our leases. However, there was an well, we you know, there was an adjusting item in there as well. So something that we deem to be unusual that we carved out of our underlying results.

31:27 And in fact, we've always carved out of our underlying results. And that is the gain or loss that we've made in the year on our FX contracts and our interest rate hedges. So modern accounting requires you to value all of those instruments at the balance sheet date. We've obviously got a lot. We buy well forward into the future with our currency. And what happened in 2022 is that we came into that year with those instruments very much in the money. It's We for us, it's really all about the US dollar RMB rate. At the end of 2021, the RMB was very strong against the dollar.

32:12 Our contracts were a lot better than that. So it gave us a very big gain. As twenty twenty twenty two proceeded, the dollar became a lot stronger against the RMB and the gain that we had on paper began to reverse. Hence, why you have this accounting charge. I can tell you for me, it doesn't mean anything about our underlying performance at all. These are contracts that will mature in the future. And when they do mature, the gain or loss that we will actually make may bear absolutely no resemblance whatsoever to what we currently got in the books. Right? So that's an explanation as to why the finance charge was higher than normal. Right. Second question is from Sam. Thank you, criteria around acquisitions?

33:05 Are there any plans to further advance in EV? Or are there any other areas of interest? Yes. Thanks, Sam. The criteria, I think, is a business that is more valuable when owned by us than it is when owned by others. So if we can we can buy a business where where we think we can, by integrating it with what we already have, we can increase the performance, increase the value, and we can buy that business at a reasonable a reasonable cost in terms of, you know, multiple of its profits. Then we ask we are, I would say, reasonably agnostic as to what that business is.

33:53 We'd like it to be in that in a market which is attractive, you know, potentially a market which has some growth and in a territory which we'd be comfortable operating. But it doesn't have to be wiring accessories. It doesn't have to be lighting. But obviously, those are areas which we understand the best and where maybe, you know, we can add the most value in terms of synergies. For EV, yes. I mean, look, we've got very big plans to expand our EV business. We we certainly plan to move our EV products into those other territories where we have international distribution. So, you know, we have businesses outside of The UK. We have successful business in Ireland.

34:39 We have a successful business in The Middle East. We have a successful business in Spain, Mexico. We would certainly want to expand the EV products into those areas. I would love to buy, you know, more EV distribution overseas. I don't think we need to do it in The UK because I think we have everything that we need in The UK to, you know, have a have a significant market share. But I think buying an EV business overseas would would be difficult and would be expensive. I mean, we paid a very reasonable multiple for the Sync EV business of about 10 times earnings, about two times sales. But I think that was a you know, it was a small business, and I think we got lucky there. I think trying to buy an EV business would be expensive, but I wouldn't rule it out.

35:26 Very good. Okay. Another one from Sam. What impact do regulatory changes have on your business model? I'm not sure they have a huge impact on our business model. You know, I talked about how regulation updates in the industry have a a beneficial impact on our revenue growth, But I can't really think of how they affect our business model. I mean, certainly, are regulations coming down the line on energy efficiency in commercial buildings, which will drive LED and lighting upgrades.

36:13 So that's a very positive thing for us, but I can't not think of any Well, I think the only thing to add maybe is that I mean, there is a constant drumbeat and march of regulatory change that generally helps with revenue and margin as John referenced earlier on. I think that just means that we have to invest continually in r and d to make sure that we can't we keep up with those regulatory changes. That's fine. And, also, I think if there are areas where, you know, we influence, actually, the regulatory outcome, not not as much as perhaps we'd like to, but in certain parts of our business. So there's a the the office power business in particular. So, you know, providing wiring devices for tables, underneath tables such as this.

37:02 We have been quite influential in terms of how regulations are drafted in that part of the market. And, of course, that is you know, that's helpful. It's a helpful place to be. Yes. I think that's fair. I mean, we we need to make sure that we are always in line and ahead of the regulations. So that does mean that our business model, as Matt says, has to involve investing in, you know, updating our products and making sure we're always where we need to be. Probably one other thing to add to that, though, is this. Sometimes these regulatory changes are not as smooth as as perhaps you might think. Sometimes they can they can come quickly or quicker than expected.

37:49 Sometimes they can be a little bit opaque. So it's incumbent upon the manufacturer to be very flexible in those kind of circumstances. And I think our vertically integrated model allows us to kind of cut through the uncertainty and probably get products into the market quicker than most. Yeah. And I'll give an example. I mean, was a significant regulatory change in the EV EV charger category on on the first of January this year that actually meant we had to we had to pull out of the market in January and February all the products that we've sold before because the regulation that, you know, only came in without much without much notice. But as a business, we were able to manage that very well. Having our own manufacturing operations mean that we can we can modify products quite quickly.

38:41 But it's one of the reasons that the EV sales were a little bit disappointing in the second half of last year. But I'm pleased to note that the EV sales are now back up to where we thought they should be. But this regulatory change did have an impact for sure. Okay. Right. So the next question is from Scott. Thank you, Scott. Appreciate I'm getting ahead of myself, but I would appreciate your thoughts on how China plus one might work. Yeah. I mean, that's a very good question. I don't think you are getting ahead of yourself. I think it's important. So an important question for us to grapple with. And I think how it would work is we would look to buy a business with low cost, non Chinese manufacturing, which would act, if you will, as a lifeboat.

39:29 China is still the cheapest place in the world to make stuff. And, you know, on lots of measures, it is still the best place to be making products in our category. But there is obviously a concentration risk we have with China. You know, whatever your thoughts on the on the likelihood of a trade of a, you know, of a future trade war with China, we are still, you know, whatever your thoughts on that, highly concentrated in one manufacturing territory. But we I don't think we would you know, I mean, we definitely don't want to want to take work away from our existing Chinese factory, but what we wanna be able to be in a position that if we needed to do that, we could do it in a hurry. And that means having a foothold, having an operation, having, you know, non Chinese, low cost manufacturing that we could expand in a hurry if we needed to.

40:36 And we the only way to do that really is via acquisition. Because if you if we did it via a greenfield site, that would inevitably mean taking volume away from our existing factory, which we wouldn't wanna do. So we are you know, we have a process. We are looking at various different opportunities. And, you know, the next act acquisition we make will probably make a step towards resolving this issue. Do you want to add that to that? That's good. Okay. Next question is from Nick. What is the headcount in the business and how is the split geographically? Any plans to increase your footprint further internationally? Should I have a get one? Yeah.

41:23 So roughly 1,700 people, Nick. Roughly a thousand of those would be in China at our manufacturing manufacturing site doing a mixture actually of manufacturing and product development. Of the seven hundred seven hundred that are not in China, roughly, I'd say sort of 500 of those would be in The UK or maybe sort of 100 to 200 in overseas sales offices. In terms of the geographic split, well, I think it comes back to what John has just been talking about in terms of the sort of China plus one strategy. I think I don't think there's any great plans to increase the sort of geographic footprint of the group generally with the exception of China plus one.

42:14 So we just have to sort of see how that how that plays out. Yeah. And I can just add. I mean, we we opened up new businesses internationally trying to take advantage of the of the technology change in the lighting industry. So we opened businesses in America, in Germany, in Spain, in Mexico, all from all from scratch. And half of those businesses have been successful, but half of them haven't been successful. Therefore, think international expansion would be, you know, via M and A. Certainly, our business in Mexico, our business in Spain, our business in The Middle East are all growing strongly and are are all doing well. And, obviously, you know, we wanna grow those businesses, but I do not think we would attempt to start any any new businesses internationally other than via m and a.

43:15 And because it is very difficult. Yeah. Okay. Well, in fact, okay. Well, let's just go through them sequentially. So back Scott. As becomes a larger part of the business, what impact do you see that having on margins? We can sort of get back to the slide, almost. Yeah. I mean the gross margin is above the group average and the operating margin is above the group average. This is mainly because we are using our existing commercial teams. We're using our existing warehousing, and we're using our existing manufacturing facilities. So, you know, the business is now fully integrated using existing group resources. Therefore, the overhead allocation is relatively light as is therefore extremely high margin for us.

44:06 So the more we can do with that, the better it will be for the group margin. Yeah. Okay. Right. Next question again from Scott. Is there any is there any way China plus one won't add to costs and reduce margins? Yes. I mean, yeah, I mean, there is a way of doing that, which is to buy a lifeboat and not use it until we need to, if we need to. My my personal view is that we will never need to. But having it is a way of reducing the risk that there is a trade war with China or there is a, you know, more serious situation with China that means our supply from China would be impacted.

44:54 But if we can buy an existing business with existing low cost manufacturing but with an existing revenue stream, then that does not need to impact on our margins. Matt, do wanna add to that? That's good. Okay. And the final question that I've got on the board is from Steven. So why didn't your French and German businesses prosper? They are, after all, the two largest euro economies. What remains for you overseas? And what are the prospects? Should we just do that follow-up to Stephen's questions first? Matt, do you want to take the first part from Matt? Well, I mean, they're big they are big economies. I think in our in our business, I think brands and brand heritage go a long way. It's one of the reasons why our business in The UK is so strong.

45:46 It's quite hard for someone else to take market share sort of away from us. And therefore, it makes it very hard when you're trying to greenfield into, particularly a new geography where you don't have any preexisting presence. The group at the time, I think it it did it it changed the right right moment to try that. It it basically our entry into France and Germany coincided with the advent of LED. So a big moment of change in the lighting industry. Barriers to entry were lowered significantly just because making an LED light is one heck of a lot cheaper in terms of CapEx than making making an incandescent bulb. So it was the right moment, and it was definitely worth a go. Ultimately, I think what we found is that, you know, we've come up against the the, you know, the barrier of quite a traditional electrical installer base that have their brand loyalty, and it's quite hard to shift them. It's the first point. And then secondly, really, for any business to make any any money, you need to achieve, you know, quite a lot of scale.

46:59 Perhaps we could have achieved that in these countries, but it would have required a very large check to get there. Ultimately, you know, we were we we would have been better off well, we determined that we'd better off cutting that check and reinvesting it elsewhere in the group where we've got a much more existing, mature, profitable presence. Yeah. And then and then what remains for overseas and what are the other prospects? I mean, as I said, you know, we do have successful overseas our Middle East business, our Spain business, our business in Ireland, our business in Asia, our business in Africa, all of those are growing. And we will continue to invest in those businesses because those are the ones that have proven they can be successful.

47:50 And, you know, China plus one will almost certainly result in a in a in an overseas acquisition. So, you know, the prospects are strong, but just not, you know, via organic growth for the reasons that Matt has just sort of say organic growth, but organic growth into new markets for the reason that Matt has just talked about. And the second question, Kingfisher seems to be doing very well. DW wins are not so. How are you addressing the latter? Well, the I mean, the reason Kingfisher is is doing very well is because of the activity that we are now also doing in DW Windsor.

48:39 So investing in the product range, improving their sourcing, improving their manufacturing, investing in more sales resources that we've done at Kingfisher, and we are applying the same formula to DW Windsor. And I have absolutely no doubt, and I'm extremely confident that the same medicine that worked for Kingfisher will work for DW Windsor. The gross margin will improve significantly, and there's a lot of work going on to make that happen. And I think by investing in the commercial operation of the business, we can also improve the revenue. So I think that business has a very strong future, has a very strong brand, has a very strong position in the market.

49:32 It is you know, it's the it's the supplier for heritage lighting in The UK. I don't doubt that it will do very well in the future. And there's one question here, Matt, about margins. So I know the second half margins much stronger than the first half margins next year. How do you think the margins will play out in 2023? What was that? Yes. Yes. Well, I think, obviously, we come into the year with good momentum, with costs certainly moving in our favor.

50:19 But I and and also, I guess, the prospect of volumes in our business, we believe, being relatively flat, I. E, the end of cost destocking being offset by a macro slowdown. So I think if you put it all together and actually, say on on selling prices, I mean, obviously, customers are aware that there's a bit of cost deflation in the system. I think that cost deflation is is benefiting us. I'm not sure it's necessarily benefit benefiting the entire industry. I think the rest of the industry, they probably got quite a bit more Western labor cost than than we've got. Obviously, that's one of the the new biggest source of cost deflation out there. So we're kind of less less exposed to that than others.

51:13 And also, the industry is still struggling with weaker sterling. Now we are impacted by weaker sterling, but not as much as others. A lot of our revenue actually comes from the dollar. So, you know, I think we will we've got a good chance of trying to maintain our pricing in in 2023 against the backdrop of lowering costs. So that should help gross margin. So and ultimately, sort of longer term. You know, I think that, you know, the business was you know, I think the business done a good job over the last, you know, five, six years of, you know, building its gross margin from the, let's say, the mid to low thirties up towards the high thirties, maybe even 40.

51:58 If you look at what we if you look at what we sell, that should be achievable. You if you pick your battles and you go for those parts of the market which are yield the best margin opportunities, then that should be achievable. I think, obviously, we need to be mindful of the macro that we are all in right now. But in normal conditions, there should be a business that's capable of achieving gross margins in the high thirties, maybe even 40. And I think, ultimately, that's the key to the business making the kind of net profits that it has made in the past, and I'm sure it will make it in the future. And maybe we should talk about operating margins. I mean, there's Yeah. You know, there is a question about whether the whether the 17% operating margin that we made in pandemic years is the new normal for LUCECO or whether the, you know, the weaker operating margin that we made last year is more normal.

53:02 Well, we would all I mean, we would definitely point to the fact that 2022 was also not a normal year at all. The significant headwind of customer destocking, as Matt said, particularly on our highest margin category wiring accessories that we make in our own manufacturing plant. So the reduction in that volume and also the weaker margin in the first half because of the time lag in order to pass through the inflationary cost increases that we experienced in 2021 resulted in a lower gross margin last year than we think we can make going forward and a lower operating margin last year because the volumes were down. So, you know, we believe that our through the cycle average operating margin, that aspiration of around fifteen percent is unchanged.

53:58 You know, average through the cycle probably means that we won't achieve that this year. We might not achieve that next year, but I think when the benign economic environment returns in a couple of years' time, our business should certainly be able to get back to that level of profitability. And if you if you average the margin over 2021 and '22, it does in fact equal slightly more than 15%. So Yeah. Very good. And I think we have no further questions. Yes, John, Matt. Thank you very much for that. I think I actually managed to address every question from from the investors. So thank you very much. And, of course, the company will review all questions submitted today, and we'll publish those responses on the investment company platform.

54:47 But just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Matt, could I just ask you for a few closing comments? Yeah. Sure. Well, look. I I can't recall how many times we've been on IMC, at least at least four. It's very important to us, actually. Retail investors represent between 1520% of our register. So, you know, doing the right outreach to to you guys a very important part of our investor relations strategy. So it's a pleasure to be back here again. Thank you for taking the time to listen to our story and the company, not me, but the company will speak to you again six months time. And on behalf of the company, I'd like to say a huge thank you to Matt for his extreme hard work and fantastic achievements over the last five years. And with that, we'll sign off.

55:40 Thank you very much, everybody. John, Matt, thanks once again for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This is going to take a few moments to complete, which I'm sure will be greatly valued by the company. On behalf of the management team of LUCECO PLC, we'd like to thank you for attending today's presentation, and good morning to you all.