Luceco plc (LUCE) Earnings Call Transcript & Summary

John Hornby. Please go ahead.

Okay. Thank you very much. And thank you very much, everybody, for attending this webcast. As you can see from our smiles on Page 2, we are extremely happy with our results from last year. And on Page 3 of the presentation, I'll take you through some of the highlights. Extremely strong financial performance. We grew our revenue by more than 30% and our operating profit, also more than 30%. And we have more than doubled our profit over the last 2 years. Our business model has shown its extraordinary strength throughout the pandemic. Our vertical integration, owning our own factory in China, was a huge help when -- with the supply chain difficulties. We had a huge amount of inflation. The cost of raw materials and shipping has been particularly difficult, but we have managed to increase our selling prices, and our operating margin actually improved over the previous year. We have also grown our business via acquisition. As you can see, we made an excellent acquisition of the DW Windsor lighting business. And only this morning, we have announced a further acquisition of a small EV charging business called Sync EV. We've also entered the commercial power market with a whole new range of products that we have built organically. And we've improved a lot on our ESG focus. We're -- we were carbon-neutral last year, and now 25% of our products are being classified as extremely low-carbon products. And with that, I will hand over to Matt, who will take you through the results.

Okay. Thank you, John. Good morning, everybody. Let me just start by taking you through some of the detail of the financial performance for the year. So I wanted to pull out some of the key highlights first on Slide 5. So obviously, there's really little doubt that 2021 was an outstanding year for the group. So revenue grew, as John said, by 30% to just over GBP 228 million. That was the biggest increase in revenue that this group has ever produced. Adjusted operating profit also grew by 30% to GBP 39 million. And of course, that means that we did a great job of converting the healthy top line progress into bottom line earnings. Furthermore, despite almost unprecedented inflation, we succeeded in expanding our adjusted operating margin by 10 basis points, 17.1%. I'll explain more about how we did that in a moment. And of course, that increase in profit resulted in a big increase in adjusted EPS to 20.2p, which naturally, we are delighted to share with investors via a dividend of 8.1p, which was 31% higher than the year before. Okay. Moving on to the income statement on Slide 6. Here, I'll give you some more color behind this outstanding performance. So the first thing to say is, obviously, we were not alone or we are not alone in reporting strong revenue growth for 2021 against what is typically a weak COVID-impacted comparative for most other businesses. I think what sets our performance apart, though, is the progress that we've made against our strong pre-COVID 2019 comparative. Our revenue is now nearly 33% higher than it was before the pandemic, and nearly all of that growth has come organically. Now cyber has undoubtedly come from supportive conditions in the U.K. RMI construction market, but there's also little doubt that we have outperformed that market. And I would explain how we have done that in a moment. There's also no doubt that the group has benefited from a broader base of growth from its increasingly diversified products and customer base. So for instance, as U.K. residential RMI markets inevitably cooled a bit as we got into the second half after a very buoyant start to the year, we saw our nonresidential and overseas businesses come through with accelerated top line growth. And we hope to make this group over time an increasingly diversified, and therefore, resilient group as time goes by. Gross margin inevitably retreated slightly as expected to 37.1%, and that was in the face of industry-wide cost -- input cost inflation. However, we are satisfied with our selling price resetting plan, which is now fully implemented and through which we expect to pass on that inflation in full. In terms of our long-term outlook on gross margin, clearly, there are inflationary pressures across the economy, but I would just say that this business has achieved 40% gross margin before the recent COVID-driven inflationary wave. And therefore, we remain confident that we can return to those kind of levels over time. Turning to overheads. These remained under tight control. So to illustrate both the overhead control and natural operating leverage in this business, we state here that in the last 2 years, we have needed only GBP 1.4 million of extra overhead to support GBP 56 million of extra sales. Indeed, all of that extra overhead actually relates to acquisitions, meaning that we are now using less overhead to support an organic business that is 30% bigger than it was before COVID. And that strong leverage of overheads basically turned gross margin compression into operating margin expansion to 17.1%. Expanding our profitability in these conditions, I believe, speaks to both the power of our brands as well as the quality of our business model. And then finally on this page, we achieved another year of late taxes. So the natural tax rate for this group, given the jurisdictions that we operate in, should be about 19%. We've kept it below 17% for the last 2 years, and that has been achieved through sensible tax planning overseas. Okay. Moving on to Slide 7. I mentioned a moment ago that we had outperformed the wider construction market. So how did we achieve that? Well, the building blocks of it were very similar to those that we set out at the time of our half year presentation. So firstly, we operate in attractive markets that are focused on the RMI side of construction. And since the year 2000, that RMI construction market has grown in the U.K., has grown faster than the wider U.K. economy. And it's also grown consistently, so it's grown in 18 of the last 21 years. And we estimate these attractive RMI construction markets, both in terms of DIY and professional, drive 80% of our top line. As you can see on the top right, these markets have also performed well during COVID over the last few years. So better than the wider U.K. economy. And you could also see that we have performed better than the wider RMI market. So how do we achieve that outperformance? Well, in all honesty, we do have a greater share than our competition of the DIY and small contractor end of the RMI spectrum. And it's that part of the RMI market that has been most buoyant as people have spent more money on their homes during COVID. But that's really only part of the story. As you can see in the bottom left, there's been a loss of self-help as well. So we picked up GBP 27.5 million of new business wins, and it's been very profitable business at that. We have used our vertically integrated model to add inventory, to combat supply chain disruption when some competitors found their warehouses empty. Our investment in our fulfillment capability meant that we got more of our inventory into the hands of the customer on time, which has been particularly valuable during this disruptive supply chain period. Now clearly, there's a good chance that our markets will not always be as buoyant as they have been in 2021, but the good news is that we have a proven ability to outperform. As you can see on the bottom right, we now have various ways of doing this. So we started life as a U.K.-based consumer-focused cable real manufacturer. Over time, what we have become is an international, increasingly contractor-oriented manufacturer of various electrical products. Our products can certainly still be found in the home, but they can also be found in the office, warehouse or factory, and of course, increasingly also on the street. So we are now an increasingly diversified business, and you can see the benefit of that in the second half of 2021 when all of our sales channels delivered healthy growth. Okay. Turning on to Slide 8. You can all see the benefits of that diversity within our performance by product segment. So all segments delivered top line and bottom line growth. And we now enjoy healthy positions within each product category, aided by the share we have taken organically during COVID as well as sensible bolt-on M&A to expand into adjacent product categories such as the recent acquisition of DW Windsor. Okay. Moving on to Slide 9. I'm sure many of you are keen to get an update from us on inflation. We have closely monitored the cost of this industry-wide issue during the year, and I've always transparently shared my latest thoughts on this with you. So just by way of update, at current prices, we continue to believe that input cost inflation across currency, freight and commodities will cost us GBP 25 million on an annualized basis in total, roughly half of that arose in 2021 with the rest expected in later years. And we expect that our selling price increases already agreed with our customers will offset this amount in full, albeit with a slight time lag. The inflationary backdrop is, of course, quite fluid at the moment. So we continue to monitor this situation closely, and we will respond accordingly. The time lag that I referenced temporarily compressed our gross margin in 2021, but this should begin to reverse from 2022 onwards. And I think the final point to make on this slide is the fact that we have found a home for GBP 25 million worth of cost inflation, which is greater in quantum than the entire profit made by the company 2 years ago, I think speaks to both the strength of our brands as well as how far we have come as a business in managing inflationary impacts. Okay. Moving on to Slide 10. Obviously, the pass-through of inflation had a significant impact on our profit progression. So in summary, we passed through GBP 7 million of the GBP 13.6 million of input cost inflation arising in the year. And that, therefore, left a GBP 6.6 million temporary profit gap. This gap will close from next year onwards. We were able to more than close this profit gap, though, with strong operational execution. So continued investment in our production facility delivered a further GBP 1.9 million of manufacturing efficiency gains. We also put a lot more volume through our existing sales and supply chain infrastructure, meaning high conversion of strong sales growth into profit. And this allowed us to protect, in fact, indeed slightly expand, our overall profit margin. Okay. Moving on to Slide 11. You've seen me share this slide with you before. So it shows the latest trends in our 4 largest inflationary drivers within the best business. In terms of latest trends, we did, in fact, see more docile inflationary conditions at the end of 2021 and the start of 2022, of course, only until the most recent terrible events in Ukraine. We do expect to see further easing in the sea container rate, notwithstanding the potential for some COVID-driven disruption, port disruption in China. However, we could also see further increases in commodities that are linked to energy, such as plastic and copper, which, of course, we are ready to react to. Okay. Moving on to Slide 12. This just gives you a bit more color on the operating leverage that we have achieved over the last 2 years. So the headline being that we have deployed no extra overheads outside of acquisitions to support the GBP 52.5 million of organic sales growth. So how have we achieved that? Well, mostly by maximizing the returns from our core businesses, particularly in the U.K. So firstly, we maximized our sales of existing products to existing customers through the consistent execution of our advantaged business model, an obvious but sometimes overlooked and very profitable source of growth. We've leveraged our existing R&D overheads to develop adjacent products to sell to our existing customers. And we've also leveraged our existing highly experienced sales teams as well as our hard-won reputation to win over new customers. And this sharp focus on getting the very most from our existing overheads before adding new ones has led us to exit the German market and close our operations in France in the year, as shown at the bottom of the slide. Our aim is to gradually enrich the quality of our business as we grow by focusing on those markets where we have the greatest advantage. Okay. Moving on to Slide 13, covering cash and debt. Cash was very much a year of 2 halves. So as you can see on the top left, we had to add GBP 12 million of extra inventory in H1. This inevitably slightly limited our free cash flow margin in that period. As you can see in the bottom left, we only did this to ensure continued customer service when supplier lead times lengthened due to well-publicized supply chain disruption. We are pleased -- we were pleased to be able to fund at least some of this with quicker cash collection from customers as shown. We will unwind the energy position as and when supplier lead time shorten. By the second half, the situation is normalizing, and we got back into the 10% to 15% free cash flow margin range that you would associate with us. But this did not prevent us from maintaining a healthy capital structure, net debt leverage, which we now define excluding IFRS 16, to align with our new bank deal, ended the year at only 0.7x EBITDA despite GBP 18 million spent on acquisitions. And that, therefore, left GBP 84 million of additional borrowing capacity for M&A, some of which we have invested in Sync EV -- the acquisition of Sync EV today. Okay. Moving on to the balance sheet, Slide 14. There's not much more to say here other than to point out that our ROI slightly improved to 36.4% in the middle of our target range, 30% to 40%. This is almost certainly the best in our sector and amongst the best, I would say, in any sector and underlines how seriously we take the management and money that others have entrusted to us. Okay. Moving on to Slide 15, performance versus targets. We pride ourselves on the consistent delivery of compelling financial performance. We put our long-term performance expectations into the public domain for the first time in 2019. And the fact that we have largely met or surpassed these targets since then despite COVID, highlights the underlying quality of this business. We originally stated our targets as performance ranges to be maintained through the economic cycle. This could imply some sort of limits on our long-term ambition, which I can assure you does not exist within the business. So we have chosen to restate our targets as minimum performance expectations, giving us the confidence to aim high and investors' confidence in our resilience. Okay. Final slide for me, Slide 16. There is no question that we have made great strides over the last 2 years. It does perhaps beg the question in some people's minds as to whether this can be sustained. I think the answer to this lies on this chart. So the answer is that this group has a long track record, both before and after listing on the stock exchange, of sustained profitable market outperformance. Our culture, our business model and our balance sheet are ideal for it. I look forward to hopefully be scaling this chart to accommodate further market outperformance in future years. And with that, I'll hand you back to John to talk you through the strategy, business review and outlook. John, I think you're on mute.

Matt, thank you very much. That was excellent. So yes, I'm going to take you through our strategy and our investment case. I'll start with a summary of the investment case. We have extremely strong positions in high-margin and consistently growing markets, and we have further room to expand within those markets. We have an advantaged business model, which we have continually invested in over many years. The advantages exist throughout the business model from designing the product to fulfilling the order. And this is aided and supported by an entrepreneurial culture. As Matt has mentioned, we deliver consistent and compelling financial outcomes, some of the best in our industry. This consistency comes from the markets we have chosen to be in and a focus on a detailed operational execution from the top down. There are 3 key elements of our strategy: to seize the expansion opportunities provided by our markets, which we have a long track record of doing. I would point to USB sockets, circuit protection and our recent very large opportunity in the EV charging market that I will come on to talk about more later; introduce innovation and new thinking into our products and processes often ahead of our industry. And we sustained this advantage over our competitors by continuous investment in our business models. So the next few slides will explore these areas in more detail. We operate in attractive markets. There are 3 main reasons why we like the markets that we operate in. They offer future growth and the attractiveness in terms of their structural growth and the margin that is available. Our current addressable U.K. market with the products that we have is approximately GBP 2 billion, and we have a 10% market share of it. But it's only 10%, which means there's plenty more to go for. We have the right culture and the business model to increase our share, focus on speed, entrepreneurialism and the customer service to seize this. Our 2021 numbers show that we are doing an excellent job of this. If we had sized our addressable market 7 or 8 years ago, it would have been half the size that it is now. This is because we've used innovation and range extension by product development to move into new markets where we can leverage our existing brand relationships and our distribution and manufacturing, et cetera. If we keep doing this organically or alternatively for M&A, we can expand our market to over GBP 3.5 billion in the U.K. and obviously more if we look to expand overseas. In short, we have a huge opportunity for synergistic growth. And then if you look at the attractiveness of our markets, we have a huge opportunity to gain market share, but also our markets offer excellent growth opportunities and margin. So I'm just going to explore why this is because of the various structural advantages that they have. We mostly serve the construction market, which typically grows faster than GDP as living standards rise, and for example, people live in smaller family units. We believe the construction RMI is the most attractive part of construction. This is because it is less constrained by issues such as planning. The housing stock is actually aging. Housing price appreciation supports it, and it is less cyclical. Electrical installation is also more attractive than construction RMI generally. This is because over time, the regulations are becoming consistently more difficult, and therefore, require higher technical products. And future growth will be stimulated by the decarbonization of the energy supply. Changes in customer preferences should allow product markets to actually grow faster than the number of electrical installations. This is because, as I say, the technology demanded by consumers is ever higher. For example, USB sockets have replaced ordinary sockets, and our EV charging sockets is a huge additional opportunity. So overall, this is putting electrical product manufacturers like us in an excellent position. We have built strong positions within these markets. We are #1 in the U.K. in portable power. We are #2 in wiring accessories, and we are now a top 10 lighting supplier. So moving on to the next slide, our growth opportunity. We have a long track record, as I said, of seizing opportunities in these attractive markets. We always look for opportunities to develop our product range and to sell new products into existing customers. Significant source of growth for the group. In the past, you can see on the left-hand side, as I mentioned earlier, USB sockets, which was an innovation of ours, LED lighting, circuit protection. These are all new products that we've launched since 2014. And you can see that 50% of the products -- sorry, 50% of our revenue is now generated from new products that we've launched in the last 3 years. The EV charging market, in which we've announced an opportunity this morning an acquisition this morning, is probably the largest growth opportunity that our company has ever had. The acquisition of Sync EV brings with it excellent technical know-how and an established brand. And I believe that over the coming years, this is a huge opportunity. But we've also won new customers. Over the last 7 years, we've won 42 million of new organic customers using our existing sales teams. And additionally, we have made further growth via acquisitions. And we have GBP 84 million within our existing capital structure to spend on M&A. On to the next slide, there's a bit more information about the business that we bought in the autumn. It was acquired in October. It's a leading U.K. manufacturer in the public realm of technical outdoor lighting. It's a well-regarded heritage brand, highly complementary to the Kingfisher business that we bought in 2017. And having owned it now for 6 months, we are very pleased with the potential of this business. It has a very strong brand. It has very strong relationships, and the market in which it's operating is expanding. On to the next slide, our investment case. We have an advantaged business model. So we make our own products. We have 80 MPD professionals in our business, and they have launched over 400 new products in 2021. Many of these were improvements on existing products, which is also extremely important. High-powered USB sockets, USB-C sockets, smart IoT versions of our fire rated downlights and EV chargers. Last year, we launched the lower-power Mode 2 version. And this year, we're launching the high-power Mode 3 version. As you will all be aware, we also make our own products. We have our own factory just outside of Shanghai, which we have continued to invest in year-on-year. And in 2021, we had about GBP 2 million of P&L benefit from the automation investments that we have made. This is obviously an ongoing process with a lot more process improvement to come. And finally, we've also invested in the marketing, in the training of the next generation of electricians. We've invested in new websites and in new digital marketing assets. And in fulfillment, we made a big investment in 2021 in our warehouse in Telford. And we also took on our own warehouse in Spain, where before we were using a third party. We have invested in the best-in-class IT, warehouse management and demand forecasting and stock planning tools. The next slide, under sustainability. Our operations were carbon-neutral last year, and we joined the CDP also. And we will join the SBTI in this year. Our products, as you know, obviously, LED lighting is extremely low carbon, but also EV charging is a move that will greatly reduce the carbon footprint. And we would forecast that by 2025, over GBP 100 million of our sales would be from low-carbon products. So we have been spending a huge amount of money on developing these product ranges, and we believe that the world will increasingly be spending a huge amount of money on using such products as the need to decarbonize only increases. Slide 25, the investment case, all of which I said before and which matters as described has led to an extremely compelling financial performance, especially in 2021. In terms of the outlook, I mean, 2021 was an exceptional year. It's a testament to our business model and our culture. It was a great year of progress. The market was favorable. The RMI market was particularly strong, especially in the DIY channel. These -- so this will be a hard comparison for 2022, particularly in the first half. We are, therefore, expecting half 1 sales to be broadly flat, which after the acquisition of DW Windsor does imply a modest like-for-like revenue decline in the core business. But all things being equal, it should get easier as the year progresses. So the comps get easier. There is more benefit obviously from the selling price increases, all of which would have come through in the second half, not all of which we have had in the first half. However, there are still risks from COVID, particularly in China. And there is also a risk that as disposable incomes will get squeezed, it will become particularly hard for the consumer. However, what happens in 2022, there is no question that our business is a lot stronger than it was 5 years ago. We have stronger market positions. We have a clearer strategy. We have broader sources of growth. We have a stronger leadership team. We have a well-invested business model that can beat the competition, and we have an extremely healthy balance sheet. We also have clear growth opportunities, particularly in EV and in M&A. And I'm very confident that we continue to outperform over the longer term. And with that, I'll hand over to any questions that people may have.

[Operator Instructions] We'll take the first question from Kevin Fogarty from Numis.

Well done on the numbers. Just a couple for me, if I could do. Just in terms of the phasing of the cost recovery in terms of the kind of plans you've made now, just could you give us any feel for what the H1 looks like relative to H2? And just in terms of clarity, Matt, did you say that some of that sort of falls into 2023 just in terms of that sort of cost recovery process? And I guess sort of second point, just in terms of today's acquisition, what's the sort of strategy here in terms of commercializing that? What are risk channels to market currently? How do you think it will sort of benefit you guys going forward? And I guess I'm thinking about -- there's obviously kind of revenue synergies here. Is there any kind of manufacturing opportunity for you guys? Or is this going to be a U.K. sort of specific product? Or just a bit more granularity on that would be great.

So perhaps, John, if I take the cost recovery question.

Sure. Sure.

Yes. Okay. Yes. So I think I highlighted there was a GBP 6.6 million net profit gap in the year that we've just completed. I'd like think that we could close a good chunk of that this year. So there's going to be a net profit tailwind versus last year's headwind. And in terms of the phasing of that, I mean there is a meaningful price increase that comes through in Q2 of this year. It's probably worth about GBP 7 million annualized. So we get a couple of months of that in the first half and a full benefit in the second half. So there will be, as John has mentioned, in terms of both the revenue progression and also the gross margin, there is a bit of a second half weighting by virtue of that one significant price increase, if that answers your question. I think -- and if we turn the headwinds into a bit of a tailwind in the year that we're currently in, that will leave a little bit left over to come through in 2023.

Sure. Okay. Just purely because of that kind of phasing from Q2 onwards effective.

Yes. That's exactly right. Yes.

Yes. So the margin in Q1 this year is below where it should be, but the margin in Q1 next year should not be below where it should be. Thank you. So we got -- we first got involved in this about a year ago. Small business, but it's got some excellent tactical people. And it's got some good brand recognition in what is a very young market, and there is a bit of land grab. So we thought that we would accelerate our progress into the market by making this acquisition, both in terms of our technical ability, but also having a brand in the market. I think it's a huge opportunity. We can sell it through our existing customers. So their route to market currently is through electrical wholesalers and to the larger installers. The UESF grant, which is the grant that the government pay subsidizing the installation of these devices, is actually being removed from 1st of April. From that point, it becomes a much more normalized product. We believe that normalized product will be bought through your local electrician. The same guys who put in a socket in your kitchen will put in a socket in your garage to charge your car. A lot of those contractors are using BG products. We are, I think, market leader in U.K. residential sockets. So this isn't just another socket. It's a high-powered socket. It's a smart socket, it's an IoT socket. But ultimately, it plugs into a consumer unit, and we have roughly 20% of U.K. consumer units in the residential space. From I think early next year, I mean they haven't quite finished the regulation, all new homes with off-street parking by law will have to have an EV charger at the point of construction. And if you're building flats, then a certain percentage of the car parking spaces for flats will also need to have an EV charger. It's going to be a huge market. And that's just in the residential space, and that's just in the U.K. We have businesses overseas in the Middle East, in Spain, in Ireland, where we think we can sell these products. And then there are other markets and there are other channels in the U.K., for example, workplace, hospitality, railway, schools, you can name a lot of places where we believe the reasonably low-powered, reasonably competitively priced, EV chargers are going to be situated. There are possible ties in with Kingfisher. There are possible ties in with DW Windsor who have very strong relationships with local authorities. House builders, I've talked about, where we have a big market share already. The lights of Screwfix will be selling these products, and obviously, they're a huge customer for us. So I think our distribution is going to be probably the best of anybody's. On the manufacturing side, we've been working on developing a product range in our own Chinese factory since we did the 20% deal with them last year. And we'll be launching those products imminently, in sort of April -- end of April. They obviously have a product range, but we've been supplementing that. And we have a slightly more competitive position making it in our own factory. So I think all in all, it's a huge opportunity for us. I think we could have done it anyway without this acquisition. But I think with this acquisition, it is derisked and it's accelerated. And I think it's very exciting.

Right. That's useful. And I guess just touching on one of those points rather than sort of hog the questions. Do you have any idea -- clearly, this expands your sort of portfolio selling into the sort of challenge you do currently. Are you aware of any competitors of yours that have a similar offering and perhaps could compete with you? Or are you likely to be one of the few with sort of diverse range of...

Currently, Kevin -- yes. I mean, currently, there are no other wiring accessory manufacturers with an EV charging socket. They currently -- I would be surprised if we weren't the only one that go down this rate. Currently, the market is dominated by EV charging start-ups. They have products, some of them have brands. They don't have great distribution, particularly into the kind of sort of resi market I'm talking about. I can't rule out other competitors will follow us.

Yes. No, no, I appreciate it's a very nascent market, but just interested...

If we get our market share of U.K. residential in this product category in line with the other product categories, it's a big number. We're not looking to -- and that would be with other competitors, obviously.

[Operator Instructions] There is currently no further questions on the telephone. I'll pass over for any webcast questions.

Thank you. We've had a couple come in on the webcast. Given geopolitical events, is the company looking to dilute the manufacturing dependence on China?

Yes. I mean, look, this is something that we've been thinking about and looking at for quite some time already. I mean, in short, the answer is yes. I mean, DW Windsor actually gives us a U.K. manufacturing base. But yes, we are pretty reliant currently on China. We've been looking at M&A opportunities nearer to home, which would mitigate that. We've been looking at Turkey. We've been looking in Eastern Europe. We've been looking at other options further fields such as Mexico. Our Chinese factory is a huge asset. It's been hugely successful over the last sort of 10 years, but we are not blind to the potential changes that are happening in the world's view of China and the potential ramifications that could have. So it is a priority to reduce our exposure to that risk.

Thank you. There have been significant direct disposals in the last 9 months, which have adversely affected sentiment and the share price. Are the management successfully confident of the future prospects to retain their remaining stakes?

I guess you're referring mainly to my share. Yes. So I crystallized the capital gains tax last year, which I needed to pay. I sold less than 10% of my -- sold about 8% of my shares. I retained the other margins. I'm extremely confident that our best times are ahead of us. I think, as we've said, the electrification, the decarbonization, of which EV is an example, we're very well placed with our distribution, with our manufacturing and our marketing know-how in order to take full advantage of that. We also -- unlike maybe 5 years ago, we also have a very strong balance sheet, and we generate a huge amount of cash so we can grow not only organically. And the graph that Matt showed in his presentation of the long-term growth, that only has one small acquisition in it. So we bought Kingfisher in 2017 for GBP 10 million, and it's got a tiny little bit of DW Windsor in 2021. But we have very consistently organically grown this business. I believe we can continue to do that by the things we've talked about: investing in the business model, investing in new products, investing in new markets. But we can now also supplement that growth with acquisitions. And we have a very strong balance sheet, and we are generating, as I say, a lot of cash. So I think the future is very exciting both organically and inorganically. And personally, having got the business to that point, I want to see what we can do with it and how far we can take it.

Can I just add to that? I mean I don't think you could -- one could always look at this as a relatively small amount of selling for the reasons that John has described. One could also look at it as a business where management have got a significant amount of interest in driving forward the value of this business. Quite unusual actually for a main market company to have this much of ownership in the hands of management, including me, to a lesser extent than John. So I mean, I think that speaks to the confidence that we have in the business. And if there ever was a moment to be confident in share price appreciation sitting as we do on 11x next year's earnings, surely, this will be a moment.

Thank you.

Yes. And I would say -- I mean I'd add to what I've said is that on a personal level, I don't have any other assets. I've been in this business for 25 years. So I think at some point, it would be very imprudent not to diversify a little bit. I mean since IPO, I've sold net about 10% of my holding, maybe a tiny bit more, but not much more over -- and that's over 5 years. So I think that kind of speaks to the confidence I have in the business in the future.

The next question for you is, do you need to increase your inventory position as you did last year?

Yes. So maybe I'll take that one, John. I think the answer is no. I mean, of course, I can't entirely predict what happens next to global supply chains. What I can tell you is whatever happens, we will always do the right thing by the customer. It's far better to have the order with the inventory than not have the order at all. So we will respond accordingly. But if I stare into my crystal ball, I would say the most likely save for some potential for COVID-0-related short-term disruption in China. I would say that global supply chains from here get a little bit more predictable and a little bit easier. We're also not going to -- I don't think -- I hate to disappoint anyone, but we're probably not going to have another year of 30% top line growth. So therefore, all things being equal, that should lend itself to inventory reduction or inventory increase. So we should get back to the kind of cash conversion and free cash flow generation that you associate hopefully with us.

The next question is on inflation outlook. Last year, you successfully passed on price increases to customers. Are you confident you can continue to do so?

I'll take that. Yes, I mean we've passed on the inflation that we experienced last year, including a very high shipping price, shipping costs. And obviously, we ship a lot of products. So that is actually coming back. It hasn't come back to anything like where it was pre-pandemic, but the shipping cost has reduced by roughly 30% from peak. We hedge certain raw materials like copper. But it is fair to say that since recent geopolitical events have been unfolding, the price of oil, which affects the price of plastic, the price of other metals, has been stronger than we would have hoped. So there will almost certainly be further price increases needed if we want to maintain our margins. But we have always and consistently been able to pass on inflation. As you can see, our margins over a long period of time have improved and have been healthy. And I don't see any reason why that wouldn't be the case now. And the inflation that we are experiencing now because of the reduction in shipping costs, which is a very large input cost for us, is a fraction of what we experienced in 2021. In fact, probably net-net, not much inflation currently. Of course, that may change. But if it does change, we have the mechanisms with our customers. We have the pricing caveats agreed, and we have an ability to pass it into the market, and that's what we will do.

In which areas of the group are you looking to enhance with further M&A?

Well, look, wiring accessories is a very high-margin business in which we have executed, in which we have a very strong position. So a quality wiring accessory business, potentially internationally, maybe that kind of mitigates the China manufacturing risk that we spoke about earlier. I mean that would be probably the perfect acquisition. Another EV acquisition may be overseas, I would certainly be very interested in. And then other product adjacencies, I mean, high-margin lighting businesses, I mean DW Windsor and Kingfisher, they are niche, they are technical, they are specified. They are, therefore, highly defensible and high-margin businesses. But there are lots of other product adjacencies where we can utilize our manufacturing expertise and our distribution expertise both in the U.K. and internationally. But wiring accessories, as you can see from our numbers, is the business about which we are most excited. So maybe that would be the most likely. All having said that, the universe of targets wiring accessories, is quite small. Matt, I think if you want to add anything.

Yes. I think the only thing to add to that is that if said wiring accessory opportunity came with kind of a ready-made near assure manufacturing option to it, then that would obviously also deal with our desire to, say, complement our presence in China with manufacturing capability elsewhere. I think that's -- regardless of what you think about the geopolitical prospects for China, I think it would be unusual. I mean we aspire to be a [ 50-50 ] business. It would be unusual for a 50-50 business to have quite so many eggs in one basket, albeit be a very big basket, clearly, mainly China. And so I think using M&A to diversify the manufacturing base would be a good thing to do.

What are the plans for overseas operations? You've pulled out of Germany, France and U.S. in the past, and they are relatively small to a group. And arguably, it's subscale. Can you focus on a couple of territories that make a meaningful impact to the group?

Yes. I mean it's true that we closed our U.S. operations. But actually, if you look at our U.S. sales, they've actually grown. So we have a distributor in the U.S. We have a sales office in Hong Kong that sells into U.S. retail. But actually our U.S. business has grown, but we've done it without having the U.S. overhead. So actually, it's growing extremely profitably. France, we've combined it to our Southern European business that sits in Barcelona. So we haven't actually withdrawn entirely from the French market, but we have consolidated the overhead into Barcelona. We have withdrawn from the German market, which we find extremely difficult. I think our -- as Matt said earlier, our strategy is to grow those businesses which we think have a competitive advantage and where we think we can win. So we're going to fight less battles, but we're going to fight them better, and we're going to put our resources into those businesses which are doing well. And we're going to be [ rufus ] with those businesses which are not doing so well. Our Spanish business is doing extremely well. Our Middle East business, which is based in Dubai and serves the whole Gulf region, has been doing -- has always done well but continues to do well. We have a business in Ireland, which is growing very strongly. And we have a business in Mexico, which is although small, also growing strongly. I think outside of M&A, we would not look to expand internationally again. It proved harder than I thought it would be to grow these businesses internationally. But we are committed to the ones that we've got now. Matt, do you want to add to that?

No. I think the only other thing to say would be, I think as you look into nationally, what we have in the U.K. is we have multiple product categories being sold through the same infrastructure, which gives us the P&L that we have. I think in our international markets, if you look at the most successful ones, they have to say, so in the Middle East, we're selling all 3 of our product categories into Middle Eastern customers. And I think that becomes a bit of a determinant for success or one of the determinants. So I think that's sort of progressive in the way we migrate to board is trying to make full use of the overheads that we have internationally by selling an expanded product set.

Thank you. We have no further questions on the webcast. So I'd like to hand it back to the team for any closing remarks.

Well, I think I've pretty much said everything. I mean a fantastic year in 2021. I think this year, particularly first half, is going to be tough to beat that comparator. I think the investments that we are making and have made both organically and inorganically, however, means that 2023 and beyond, we can return to good growth. And we look forward to executing the plans that we've got in place. Matt, do you want to...

No. I think that's a perfect summary. And it is fantastic.

Okay. Thank you very much, everybody.