Luceco (LSE:LUCE) — Final results for the year ended 31 December 2020

0:02 Good morning, ladies and gentlemen, and welcome to the LUCECO Final Results Investor Presentation. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Just simply type in your question and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company review all questions submitted today and publish responses where it is appropriate to do so. These will be made available via your Investor Meet company dashboard, and

0:32 we will send you an e mail notifying you when they are ready for your review. I'd also like to remind you that this presentation is being recorded. Before we begin, we'd like to submit the following poll, and if you could give that your attention, that would be most grateful. I'd now like to hand over to Matt Webb, CFO and John Hornby, CEO from LUCECO. Good morning to you both. Hello, Mark, and thank you very much for that introduction. And good morning, everybody. We are very pleased to be able to be here this this morning to talk about our company, LUCECO PLC. If we slide on slide two, we are a a manufacturer and designer of electrical products. This year, we'll turn over approximately £200,000,000 in in the main categories of wiring accessories, LED lighting, and portable power.

1:26 We supply all of the major customers in The UK market where we have 80% of our revenue, but we all also have small overseas operations in Spain, in Germany, in UAE, Mexico, Hong Kong, and South Africa. We make the majority of of the products at our own factory outside Shanghai in China, and we've been operating in the Far East for over twenty five years. Our brands are extremely established with leading market positions. And in fact, Masterplug is the clear market leader. The BG brand is the number two in the market. And LUCECO, it's although it's a young business, already has a very strong reputation and very strong relationships in the market.

2:17 So I'll just run you through the individual categories in which we operate. The first and most important is the wiring accessory categories under the BG brand. We are number two in The UK market, which is worth approximately 500,000,000. And you can see on the screen some images of the products that we sell. It's an extremely high margin category, and we make an operating margin last year of approximately 28%, and the business has been growing very strongly. We have recently launched, on the next slide, into the commercial office power. This is a completely new market for us, which we think is worth about 200,000,000. We are launching a new range of products in the next month or so, and we have extreme high hopes with this high margin category.

3:11 LED lighting, we launched organically in 2013. And prior to that, we had no lighting in our business at all. This year, we'll do over £50,000,000, and we have a wide range of products. Some of the images you can see on the screen. The UK market is worth approximately 700,000,000, and we are now in the top 10 with a market share of approaching 5%. The business has been growing very strongly over the last five years. The operating margin of this business is weaker than the others as a result of our international startups, which are very young and as yet a bit small to be making a meaningful return. We bought in 2017, on the next slide, a small lighting business called Kingfisher Lighting, which is which is a specialist in outdoor, high end architectural lighting.

4:05 It has a high margin. Although last year, it was quite severely impacted by the pandemic, but normally makes a sort of mid teens operating margin. The UK market is worth about 100,000,000 for these products, so it has about a 15% market share.

4:24 So master plug on the next slide is our portable power category. The UK market's worth about 100,000,000, and and we have approximately a 40% market share. It's the dominant brand in the market, has the widest range, and the strongest electrical distribution across the country.

4:47 On slide eight, you can see some of our our customers and the kind of customers who we supply. So Screwfix is our largest customer. We also do a lot of business with the likes of Toolstation, all the DIY sheds, Wix, Homebase, obviously, B and Q, internationally with Homeback and Obi. But we also deal a lot in the electrical wholesale channel, the likes of Rexel and Edmondson, which is where the professional electrical contractor will go to buy his products. As well as that, we operate and sell to all the major builders, the contractors, the designers, architects, well as to all the major national house builders.

5:41 You can see on slide nine how the sales split by division. Wiring accessories is mainly in through the professional channel, whereas portable power, for example, is mainly in to the retail and consumer channel.

6:02 On the next slide, 10, you can see where the products are coming from, how they are sold, and what the end markets look like. So the vast majority of our products are from China, as you can see on the graphic, and we supply the market either either what we call FOB, I e, we supply the customer in the Far East and they actually import the products themselves, or in the end market where we warehouse the product and we distribute locally. And as you can see on the right hand side, 80% of the sales are in The UK. We have small businesses in Europe and Americas and Asia. So the group history. So the BG brand actually goes back as far as 1941.

6:53 So it's a it's a extremely old and extremely respected legacy wiring accessory brand. It is has total recognition amongst the professional electrical contractors in The UK and is the number two brand. Master Plug is is more recent. It was created in 1988, who's still an extremely old and heritage brand. In 2000, there was a deal that actually merged the BG and Masterpoll, like, businesses together in a leveraged buyout. And in 2005, we did a secondary buyout. And then in 2008, we opened our own manufacturing plant in the Far East, having transferred the production from The UK out to the Far East in the early two thousands.

7:51 We then expanded our factory and launched LED lighting in 2013. We then, in 2016, had an IPO. And in 2017, we grew the business further with the acquisition of Kingfisher Lighting.

8:10 The I think, Matt, I'm handing over to you for this slide. That's right. Yeah. Thank you, John. And good morning, everyone. So now you're familiar with our background. Let me just explain to you the investment case behind the company, so why you should invest in LUCECO. There are three reasons why. So firstly, we are exposed to what we believe are attractive markets. Secondly, we operate in those markets with what we believe is an advantage business model. And those two things combined generate some pretty attractive financial outcomes. Okay. So let me just move us back onto the slide. There we go.

8:59 So why are the markets attractive? Well, they are a steady source of above average growth. The reason for that is that most of our products are sold into construction RMI. Construction in the markets in which we operate tends to be GDP plus, and RMI is, you know, is pretty stable. There's a there's a steady drumbeat of renovation activity in all of the markets in which we operate. So dependable above average growth. The markets are also structurally high margin. Let me just for some reason, the slides keep moving around. Let me just move back. So sorry to cut across. John, if you could turn the slides at at the appropriate time, Matt will take control of the slides through his presentation.

9:47 Thank you, sir. Okay. So I was just saying, so the markets are structurally higher margin. The reason for that is because most of our products are sold to the professional. The professional doesn't tend to focus so much on price. They focus far more on the quality, the reliability, the performance of the product, and its availability, and we believe that our brand is synonymous with those attributes. Okay. So our business model, we believe to be advantaged. The reason is is that we offer what I've just mentioned. So we invest in those key processes that drive quality, reliability, product performance, and availability.

10:34 The most important processes for this are product development, manufacturing, and fulfillment capability, and we invest disproportionately in those. We believe that our capability in those areas is best in class. Now those two things combined give us some pretty compelling financial outcomes. They're sufficiently predictable that we're we're prepared to put our name to these and put some targets into the market for them. So just to go through them in summary, so decent growth. So five to 10% top line growth compound average. We would view that as 5% organic and 5% acquired. The margin that we get from that growth is pretty good. So adjusted operating margin in the range of 15 to 20%.

11:25 We'd convert the majority of that into cash, so free cash flow margin in the range of 10 to 15%. Not that capital intensive as a business, so only three to 4% of revenue gets reinvested in CapEx, and that includes our reinvestment in new product development. And that combination, so high profit, high cash, relatively low capital intensity, generates good ROCE, so 30 to 40%. And the cash that the business generates from this is able to fund the dividend payout in the range of 40 to 60%. So that's what you should expect if you invest in us. Okay. So let's look at our current strategic objectives. There are six of them.

12:13 We believe that we are most successful, and we believe our business model lends itself most to professional customers customers. So over time, we've gradually grown our base of professional customers. We intend to do that more going forward. Secondly, we intend to grow our international presence. As John mentioned, our international business is still relatively young. We have a big opportunity to gain share. And if we do so, we can generate disproportionate profit from those from those businesses. Thirdly, we want to move into new product segments. So, actually, LED was an example of this back in 2013. The advantage for us is that these products can be sold through our existing sales channels using our existing distribution relationships.

13:06 And often, the products will end up into the hands of the same end user, namely the professional electrician. So there's lots of opportunity for us to gain greater share of new product segments. Fourthly, we want to continue to optimize our balance sheet. So this is something that we've really focused on over the last two or three years. We've we've driven even greater working capital efficiency in particular. That has, combined with our profitability, that has generated a lot of cash. And we see lots of opportunity for us to use that cash cash to invest in future acquisitions. Kingfisher Lighting, which John mentioned earlier, was an example of that back in 2017, and we believe that's been a great deal for us.

13:55 The fifth objective then is to continue to invest in and enhance our business model, and I would just pull out three things that we're focused on right now. So factory automation, fulfillment technology, so investing in our in our warehousing capability both in terms of the software that sits behind it as well as the assets that sit within it, and also to invest in various different IT enhancements across the business. So there's lots of opportunity for us to do that. So we can continue to invest in and enhance the business model. And then finally, this is a more recent thing for us. So we want to continue to develop and enhance our ESG credentials. They are already quite strong because we sell LED lights, I. E, a very energy efficient product.

14:44 But the green agenda is throwing up additional opportunities for us to move into other green areas, other green products. So there's a big opportunity there, but also what we want to do is to make our own operations greener. And for that reason, we have recently committed to eliminating or offsetting all of the carbon emissions within our own business. Okay. So that's what we're focused on. If I move on to the next slide, I think it's clear from what I've said that the business generates a lot of cash. And therefore, you know, what we have is a clear strategy in terms of how we intend to use that cash. Now in order of priority, what do we wanna do with it? So the first priority is to pay a decent dividend to shareholders.

15:34 So 40 to 60% of earnings, and we intend to make our dividend progressive. Secondly, we want to obviously continue to reinvest money back into the business to sustain our growth, to sustain our product pipeline as well as enhance our business model. Third in the order priorities would be would then be to invest in m and a. So I think even after boxes one and two, there will still be plenty of cash left off left over. We would estimate circa 10 to £15,000,000 a year, and there is actually quite a lot of capacity in the balance sheet now preexisting for for M and A. So we see lots of opportunities to to to grow our presence in different markets through a sensible M and A strategy.

16:23 And then finally, if there's any money left over after that, then obviously, we will return it, find a way to return it to shareholders. Now what is our objective within all of this? Well, it's to maintain conservative leverage, which

16:36 we have defined as keeping our debt net debt between one and two times EBITDA. Currently, it's at no point five times EBITDA, so we are below our targeted range. And therefore, we do, as I mentioned a minute ago, we do have the balance sheet capacity to spend invest more in the business, particularly in m and a in m m and a. And we would estimate that to be worth about £70,000,000 today. So certainly a considerable war chest to execute our M and A strategy. Okay. Moving on to slide 15 here. So this this shows you how successful our strategy has been over the years. So I'm giving you an eleven year history of some key numbers dating back to 2009.

17:27 So I've given you progression in revenue and operating profit.

17:31 But you can see sort of four distinct phases to the group's development. So the first phase is what I would call the China advantage. So as John mentioned, we were one of the first to move our manufacturing and sources sourcing to the to the Far East. That gave us an advantage in terms of cost and quality, actually, over the competition, which we retain today, and it drove the first phase in the group's improvement in performance. The second phase was then our move into both LED and in into international markets. In fact, in many ways, we used LED to penetrate international markets. So you can see that coincided with an acceleration in the rate of progress in the group, and it was that acceleration that allowed the business to IPO in 2016.

18:26 Immediately after IPO, I think, in all candor, the business experienced a couple of post IPO speed bumps, as you can see in the numbers there. I think I would put that down to the IPO process being a bit of a distraction, which many newly listed businesses find. The good news is that the group then soon recovered from that. So from 2018 onwards, we've entered our third phase of progress.

18:53 And that I would describe as a more managed rate of growth. So making sure that we focus as a business on growing our highest quality profitability and cash generative parts of the business. And you can see that that has really that has really accelerated the rate of progress on the bottom line, so a tripling of operating profit over the most recent two years. Okay. Moving on to the next slide. So I think if you're familiar with us, you'll know that we published our full year results for 2020 last week. So it's good to have the opportunity to explain those to you today. So starting with the income statement, revenue grew by 2.4% in 2020 to 176,200,000.

19:44 So the good news is that we were still able to grow in the year of COVID, but there's no question COVID still held us back. So it was a slight headwind to the business overall. And I think, therefore, we're confident that the business can return to higher levels of growth in 2021 as, hopefully, we all move beyond COVID. The second second thing to say about our revenue performance is that there's no question that was better than the market. So to give you a a sense for that, as as John has described earlier, wiring accessories is our most important product segment. We know that The UK market for wiring accessories declined by 6% in 2020.

20:29 We grew our wiring accessory accessory sales by 16%, so very significant outperformance, and I'll come to explain the reasons for that in a second.

20:40 Okay. But the real I mean, revenue I think the revenue performance was was good in the context of a difficult market, but what really stood out to us in the year was the gross margin progress. So 360 basis points higher at nearly 40%. And the key message there is that progress was nearly all delivered from within the business, and this has been a feature of LUCECO's results for the last couple of years. So a significant reduction in the cost of products that we make, so manufacturing efficiency gains, as well as benefits from from designing and sourcing lower cost versions of products that we don't make, and that's particularly true in the LED category. So lots of progress on reducing cost of goods sold, if you like.

21:29 But, also, there was, you know, as a consequence of of what I've just said, there was really quite a high mix of wiring accessories. So strong growth there, strong progress overall. Wiring accessories is our highest margin category. So an increased and enriched mix of wiring accessories certainly helped the overall group's gross margin. In terms of overheads, so we managed our overheads, as you can imagine, very closely at the start of the year as COVID hit the markets in which we operate. So very tight control of overheads in the

22:06 first half. Even though the group as a whole had a really quite strong second half, as you can see in the table there, we still kept the overheads under very tight control. So a lot of the benefits of new ways of working that we've adopted and many others have too as a result of COVID, we kept those benefits in both the first half and the second half, and it's left left us with a lower overhead base as we as we move into into the new financial year. So the combination of those two things really, so so good control of gross margin or good improvement in gross margin, tight control of overheads resulted in the operating profit growing by two thirds to 30,000,000 even though the year as a whole was relatively low top line growth.

22:56 And then we've made the very most of that operating profit by delivering the the company's lowest ever tax rate of 16.4%. So lots of work has been done over the last two years in terms of tax planning, and you can see the benefits of that there. And then the combination of strong operating profit growth and low tax meant that we basically doubled the earnings per share to 15.5 p.

23:22 Okay. So this slide just shows you how COVID impacted the business during the year. So it's showing you the progress by quarter, and this is sort of a daily recalculation of our annual revenue, if that makes sense. So it's a sort of real time snapshot of how of how COVID was impacting us. If you look at the first quarter, we did lose a little bit of ground. The the reason for that is that, obviously, we have a big presence in China. China was the first to experience COVID, and our factory, as a consequence, was closed for a couple of weeks in February. So there was a fair bit of disruption there. The good news is that we had largely recovered that from that by the end of the first quarter. So we had a lot of displaced workers when China started its own national lockdown. We managed to get all our workers back by the end of the first quarter only for then COVID to appear in the markets in which we sell at the start of q two, particularly in The UK, obviously. So The UK entered its first lockdown at that time.

24:28 That initially had quite a dramatic dramatic impact on our revenue line. So if you see the sort of the slope on the chart at the start of that second quarter, it was the most downward of the year. The really interesting thing for us is that that's really as bad as it got. So what we what we now know, and we didn't necessarily anticipate at the time, is that people locked down at home were more willing to spend money on their homes, and we were actually really well placed to cater for that demand. And the reason is is because we have a really high share of multichannel capable distributors. So online is like Amazon, high what we would call hybrid operators such as Screwfix and Toolstation.

25:14 They remained open throughout this and and were able to serve the customer, and we have a disproportionate share of those kind of customers, so we did well. As we got into the second half, you can then see a gradual recovery in our revenue line. So the the residential side of the business remained strong, and we also saw some improvement within the professional wholesale channel as well. So whilst in the first half, the more traditional wholesalers were closed, by the second half, they found a way to operate their branch networks in a COVID secure kind of way, and that basically unleashed quite a lot of demand in h two. And, again, we did well during this period because of our vertically integrated manufacturing model. So we could bring manufacturing capacity back on stream quicker than our competitors because we have our own factory, and that factory does what we tell it to do. A lot of our competitors, they rely on outsourced manufacturing, and it's just much more difficult to get that kind of response when you're dealing with a third party. So so good progress in h two.

26:25 As you can see at the very end of that chart, as we get into 2021, there's been, if anything, an acceleration in our rate of growth. So things are set very fair for for 2021 for us. The reason for that is because we see see continued good demand within our markets, but also, of course, we're beginning to compare ourselves against slightly lower comparatives. So this is one of the reasons why we say that we're confident that the revenue growth in the business in the first half of twenty twenty one will be stronger than it was at the very end of twenty twenty. Okay. So this gives you a little bit more color on the dynamics within the revenue line. So I think it's clear from what I've been saying that different parts of the business responded differently to COVID, and this gives you a breakdown of that.

27:22 So one way to look at our business is to carve it up in terms of the channels that we sell into. So and those channels, we have we have four identified channels. So there's the retail channel, so where we where we sell consumer our consumer products through retail distributors, something here of the DIY sheds, online as such as Amazon as well as the high street grocers. You also have at the other end of the spectrum, you have the professional channels through whom we sell our professional grade products to to electricians. We divide that into two. So there's professional wholesale, which I think probably needs no further introduction, but there's also what we call professional prod projects. So this is where we are selling actually directly to the professed professional themselves.

28:12 So selling to designers or architects or contractors. So we we agree the sale of direct is quite a different channel for us. So and in the middle between those two, there's what we call the hybrid. So this is Screwfix and Toolstation where they deal with both professionals and consumers, but they deal with them using a quite advanced multichannel model where you can place your order or receive your goods in a number of different ways, and that was obviously very useful during lockdown. So if you look at those four channels, you can see the performance was really quite quite disparate. For me, you see two benefits. So we participate in all four of these channels, whereas many of our competitors will focus disproportionately on one, and most of them focus on on the one in the in the bottom left, I e, professional wholesale.

29:05 If we had done that, a, we would have missed out on some opportunities, and b, it would have made made for quite a bit more volatile kind of a year. So we had the benefit of diverse channel access. And the second benefit for us is that we because of our focus on online capable customers, you know, we gained share as those kind of customers gained share. And you can see that most evidently in the top right. So the hybrid channel did far better throughout the year, but particularly in the second half. And as they did better, we did better as well. Okay. So let me just talk to you about gross margin. So the last couple of years have seen a real significant improvement in the profitability of LUCECO.

29:56 And I'm sort of sort of sharing this slide to show you how much progress has been made. So for this purpose, I'm comparing the results for 2020 back to the results from three years ago, '17, as you can see in the table. In summary, what we've been able to do is to double the operating profit and deliver that from a not dissimilar revenue line. The reason why we've been able to do this is because of progress on gross margin. So three years ago, our gross margin was below 30. In our most recent recent year, the gross margin was very nearly 40. So significant progress. Where has that progress come come from? Well, you can see in the waterfall chart below how we've how we've completely rebased the gross margin. So there has been some increase in selling prices at the at the start of 2018.

30:49 That was in in response to some cost inflation that was impacting the market at the time. So the the takeaway there is that by virtue of the the customers that we deal with and their allegiance to our brands, we do have price power in the market to reset selling prices if we if we need to. But, certainly, the gross margin progress didn't just solely come from that. There's a lot of gross margin that came from within the business as well. So we've enriched the sales mix by selling more wiring accessories over this over time. We have made our manufacturing capability ever more efficient, and we've also sourced lower cost versions of existing products as well. So those have been the key drivers for gross margin improvement, and there's certainly more that we would expect to come in those areas over time in normal market conditions.

31:48 Okay. So now the good news is that improvement in profitability has shown its face in the cash flow statement as well. So another year of really quite strong cash generation for the group. This has been three years now, I believe, where the free cash flow margin has been into double digits, which is a strong performance. And interestingly, in the latest year, that was achieved despite the fact that we had bit of a cash outflow on working capital. So the business is carrying higher working capital now than it did twelve months ago. I know there's been a question on this, and I can I'll go through it in more detail during q and a. But fundamentally, that was a product of two things. So really strong revenue growth in the at the very end of the year that just left a bit more working capital on the balance sheet at year end as well as, I think, some well publicized poor delays both in China and The UK that left us with basically inventory on the water rather than in the in the hands of customers.

32:56 And then that also slowed down the rate at which we can we can collect cash from from customers. But I'll as I said, I'll cover that in more detail during q and a q and a perhaps. But let's say for that another a year of strong cash generation. So the good progress that we made in 2020 actually caused us to revisit some of the targets that we had introduced, actually only relatively recently. So we launched our our target program during 2019. And I think it's fair to say that because this is the first time the business had done this, we did launch them in a fairly conservative way. With that being said, I certainly didn't expect to expect to be exceeding our targets during the year of COVID, and yet that's what we've done. So so we've rebased them upwards, as you can see on the right hand side. I think I've talked through some of these numbers already on an earlier slide, so I won't go into a huge amount of detail.

33:55 But suffice to say, I I repeat what I said previously, and that is that this is a business that generates some compelling financial outcomes. And I think by by virtue of the markets that it operates in and the business model it uses, it can consistently generate these kind of these kind of outputs. So so yeah. So that's with that, I think, I think that being my final slide, I'll hand back to John. If he's still there, we can he'll take you through the outlook statement. Matt, thank you very much. Yes. I'm still here. So as Matt has said, revenue growth has accelerated into the first half of this this year. We're now expecting over a 100,000,000 in the first half, which should be will be growth of north of 40%.

34:43 And as I said at the beginning, the revenue for the year should be north of 200,000,000 against a 100 and 176 last year. So that is significant progress. In terms of margins, the gross margin will be lower as Matt has taught, and I think there's some q and a on this. The inflationary environment has definitely changed. The price of copper, for example, has increased a lot. The price of shipping has increased a lot. In fact, all materials have increased a lot. So it will take some time for us to pass these increases into the market. We're extremely confident that we can pass them in, and we have done so before, but it there will be a time lag. So gross margin will be down. However, the additional revenue over the over the fixed overhead of the business will mean that we will be able to make a consistent operating margin for that that we made last year.

35:41 So we are forecasting roughly 200,000,000 of sales with a 17% operating margin. And, you know, our customer our customers with whom we are doing strong who sorry. Who we are strong, the likes of Screwfix and Toolstation, are greatly outperforming the market. And as long as this trend continues, we will be able to grow our business. So with that, I'm going to hand over to Q questions using the Q and A tab situated on the right hand corner of the screen. But just while the company take a few moments to review investor 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 Meet company dashboard, and we'll notify you by e mail when they're ready for you to review. I'd also like to remind you that your feedback is important to the company. And immediately after the presentation has ended, you'll be redirected to the opportunity to provide feedback in order that the company can better understand your views and expectations.

36:52 Matt, John, obviously, investors have the ability to pre submit questions. So perhaps I could start off with those before looking at those that have come in the live event. The first one reads, working capital shot up as of the 12/31/2020. The commentary said this was due to one off factors. Has working capital now normalized as expected? Yeah. So as I said, I'd I'd I'd covered this very briefly during the presentation, but let let me just expand. So I think if you look at our overall working capital in 2020, it was about 30% higher net working capital than the than the year before. I can tell you that our sales growth in the month of December was 30%.

37:37 So those two things were quite consistent. Obviously, it's gonna be difficult for us to bring the working capital down whilst the activity growth is so high, but that's what you would describe as a high quality problem to to have. That being said, there was a bit of a one off factor as well within this. And I I mentioned earlier about the the port delays that we experienced. So literally left a lot of our product on the water. I'm sure some of our product right now is somewhere near the Suez Canal. So and it also because we sell to a lot of our big customers using letters of credit, you can only when you present your letter credit to the bank, it has to be supported by certain port documents.

38:23 And with the ports being so billy busy, it just took us a little bit of extra time to bring those documents together. Has it come down? Well, as I say, the growth in the business remains high, so it's difficult to bring it down. That being said, some of these one off factors are beginning to ameliorate. So to put it in cost context, we've seen a sort of a circa 5,000,000 to £10,000,000 reversal so far this year, and I would expect that trend to continue as we progress through the rest of this half. So by the time we come back to investors at the half year, we should be looking at a slightly lower working capital position. Thank you, Matt. The next question, how significant has the impact been on the business caused by issues to the supply chain and access to raw materials?

39:15 Yeah. Thanks. I'll I'll take that one. The supply chain situation last year was, you know, was complicated. I mean, in February, the factories were closed because of COVID. They reopened in March, and we got the factories up to sort of full speed. Then with the April lockdowns in Europe, we slowed the factories right down. And then with the stronger demand in the second half, they were playing catch up, you know, really throughout the rest of the year. There were labor shortages in China. There were there there were and are sort of material shortages, particularly sort of components electronic components.

40:07 There are ongoing major global shortages. And then the shipping situation was complicated. Not enough ships, not enough containers, you know, ships and containers in the wrong place. So the lead time from China actually doubled last year. All of these situations have improved, but they are certainly not completely sort of removed. I mean, shipping, as Matt has mentioned, the sewage issue, that's gonna add, I think, complications. Again, you know, ships and containers in the wrong place. ICs from Taiwan, there is still a major global shortage. The cost of raw materials has gone up a lot.

40:53 So, know, it has been difficult. It continues to be to be difficult. But our sales in q four were 25% up on the previous year. Our sales in h one are gonna be 40% up on the previous year. So, clearly, you know, these problems, although they are large, are not unsurmountable and are not holding back the business to a significant extent. And I think, as Matt said, owning our own manufacturing plant is a big advantage. Thank you very much indeed, John. Just one final pre submitted question, I guess, before addressing the the ones that have come in the live meeting. How do you see the selling market split longer term? Will The UK remain your focus? Yeah. I mean, look, The UK is 80% of group revenue.

41:45 We understand the market here very well. We have a lot of a lot of customers, a lot of relationships in The UK. So I think, although our ambition is to grow into I think The UK will always be our largest market. That's perfect. Thank you. Well, now perhaps I could just ask you to open that Q and A tab. You'll see investors have submitted a number of questions. Perhaps if I could ask you to read out those questions and where appropriate, and of course, give an answer where it's appropriate to do so, and then I'll pick up from you at the end. Sure. Okay. So first question is, do you only manufacture in one location in the Far East? And given your sales focus is in The UK, would you look to supply from a dual location?

42:33 So I think there's probably an element of reassuring within that within that question. Yeah. I mean, we don't only manufacture from one location. We only ourselves have one factory, but we use multiple other OEM factories. So BGY accessories, we make our own factory. The multiple portable power range, we make it a third party. And the majority of LED lighting now we make our partners. So we are using multiple factories. It is true that we do have single source for, you know, large parts of our product range. And, you know, China is becoming a little bit more complicated. You know, we all know what has been going on, you know, in different parts of China, which maybe will present some challenges in the future. So it's under consideration.

43:27 Opening up, you know, new factories in in other territories is a huge job, but it's one that we may want to confront in the future. But we don't, at this moment, have any plans to open up factories in any other locations. Okay. So the next question is how big a part do acquisitions play in your growth, and what do you look for in future targets? I mean, I'm I'm happy to take this long. Yeah. So I think I mentioned earlier that we look for five to 10% growth revenue growth in total. Roughly half of that, we would see as coming from acquisitions. That's sort of in steady state. But at the moment, because of the work we've done on the balance sheet, we actually have quite a lot of capacity within our capital structure to invest in acquisitions.

44:22 So if we spend that money, what you would see is a, you know, a big one off, you know, increase in revenue as a result of that. So I think it's fair to say in total that we we see them as playing a a significant role in our in our future growth. What do we look for? I think we have three priorities, basically. So buying another wiring accessory brand, whether that be in The UK or Europe, would be fantastic. It's a business that we know. It generates great margins already, and it's it would come with clear synergies. So and we it would come with a sales synergy and a manufacturing synergy potentially and also an admin synergy. So I think buying wiring accessories would be great.

45:10 The joint second priority would be to to buy another high end professional LED business, much like we did with Kingfisher Lighting. So we know, again, we know the business. We know that we can generate synergies from that. And then the third priority will be used to use M and A to move into an adjacent professional product category. And again, the logic would be sales synergies, manufacturing synergies, etcetera. I think if you look at the if you look at what's around us, if you look at those opportunities, there's a lot of white space. So we're very confident and excited by our M and A opportunity. And as we would certainly be a bit disappointed if we don't have something to share on that by the end of this year.

45:58 Okay. So that's that one. How next question is, how much room is there to improve your margins beyond the significant progress you have made already? That depends if you're talking about gross margin or operating margin. In terms of gross margin, we exited last year with a 41% gross margin. I think if we improve the product mix, get into more technical areas, things like office power, EV charging EV charging that we are now investing in, and the and the mix, you know, moves towards those higher margin products, then we can improve the gross margin. But I think, you know, much beyond sort of low forties with our products is gonna be difficult.

46:49 However, operating margins, we should be able to move those forward because we've got international businesses, as I said earlier, which at the moment are making zero operating margin. So roughly 15% of the revenue of the group does not make much contribution to the overall operating margin. And as those businesses grow and rescale, they will make a decent return, and that will be able to drag up the group operating margin percentage. So I think we can target I mean, I think Matt's put together targets of 15 to 20% operating margin. We would like to be able to move towards the higher end of that range in the coming years.

47:35 Yep. Okay. Next question is linked into what you just mentioned, actually. So what is the expected margin and revenue growth for the soon to be launched Office Power range? Yeah. I mean, the range I mean, the market, as we said in the presentation, worth about 200,000,000. A 5% share after three years, a 10% share after five years, a 20% share after ten years would be an excellent achievement. But that is roughly what we would be targeting. Gross margins, we think, are very high, north of 60%, and operating margins would also be very high, probably around the the margin that we make on wiring accessories generally as we are using all the group infrastructure for this range of products, and the extra commercial overhead we need to add to the business is quite limited.

48:32 Okay. And then the final question so far submitted is quite an interesting one. So where do you see the most competitive pressure coming from, and how do you combat this? Well, why don't I give you my answer, then Matt can give you his. Other Chinese factories would be the straight answer. That would be the simple answer. And we combat this by having a better Chinese factory than other people. So investing more in automation, more in process improvement, better engineering solutions, and really driving our competitive, you know, position at our our our our own factory, particularly, where we have the scale and and the volume to do so. Matt, what would you Yeah. Well, I definitely agree with that. And I think it it it also depends upon what part of the business that you're looking at. So at those parts of the business which are professionally oriented with strong branding, where the debate with the customer is not about price but about other things, The competitive pressure in those parts of the markets is is not that strong, actually.

49:39 There are other parts of the business where, you know, there are less of those attributes, and therefore, the competition is stronger. So Portable Power as a category is a consumer facing brand where the consumer brand loyalty is, you know, not quite so strong. So it's a little bit harder for us to fend off competition in that part of the business. But luckily, the parts of the business that are, you know, more valuable, frankly, for us, you know, we're able to do a much better job. So I'm thinking here of wiring accessories and high end professional grade LED. Matt, John, thank you very much indeed. I mean, that is, as you just highlighted, that's the last question that's come in during the meeting itself and perfect timing, giving we're coming up to the hour.

50:25 So perhaps before I redirect investors to provide you with feedback, I could hand back to you just for closing remarks. And then as I say, I will end the session and divert investors for feedback. Okay. Thanks, Mark. I just there's one thing we haven't really spoken about, which we consider to be an extremely exciting opportunity, which is EV charging. So I'll just close by saying that this is a new range that we are we'll be launching at the end of this year, early next year. It is a huge potential market. Every home in the country with off street parking is likely to have an EV charger by 2035. That is something like, I don't know, 15,000,000 homes.

51:14 And, additionally, in the workplace, there will also be EV chargers, electric vehicle chargers. This is a range which will be installed by our customer base, and it will be sold through all the distributors who we deal with at the moment. House builders, I think, will have to install EV chargers by law into all new properties. So with our brand, with our manufacturing capability, and with our distribution capability, we believe that we will be able to take a meaningful share of this market that we value at approximately £5,000,000,000 is the cost of all the products once they are installed. So that's a very exciting opportunity.

52:01 And, hopefully, this time next year, we'll be able to update you on the progress that we've made in this area. Thank you very much indeed to John and to Matt for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide feedback? If you access this meeting from our website, then the feedback page will appear automatically. But if you access this meeting via the link sent to via email, you'll be asked to simply log back in to provide your feedback, and I think the company would greatly appreciate your views and expectations. On behalf of the team of LUCECO, I'd like to thank you very much indeed for attending today's presentation. That now concludes today's session, and good morning to you all.